مقاومت بانک دربرابر شوک های سیستمیک و ثبات سیستم بانکداری: کوچک زیباست

Utilising a novel empirical approach and an extensive sample of listed European banks, we identify which bank characteristics offer a shelter from systemic shocks and compare the relative effects of several hypothetical prudential rules on a bank’s risk exposure. While the results show that restrictions on a bank’s leverage ratio and the imposition of liquidity requirements, as in the Basel III Accord, may improve the resilience of a bank to systemic events, they also demonstrate that bank size, the share of non-interest income and asset growth (none of which are at the centre of the new regulatory landscape) are key determinants of a bank’s risk exposure. In particular, the introduction of a cap on bank absolute size appears the most effective tool, ceteris paribus, to reduce the default risk of a bank given systemic events. Furthermore, in spite of the integration process of the financial industry in Europe, the analysis presented here shows that such a cap should be country-specific with smaller economies requiring smaller banks. Finally, we show that the strengthening of individual bank stability obtained via size restrictions is accompanied by a reduction of the contribution to systemic risk for banks which are relatively large compared to the domestic economy.

The global financial crisis, which erupted in the middle of 2007, has highlighted the inadequacy of existing banking regulations with regards to safeguarding systemic stability. The regulatory framework is deemed to have been insufficient to limit excessive risk taking by banks and, consequently, to contain the number of bank defaults over the crisis period. As a result, a general consensus among academics and regulators has emerged on the need to modify the regulatory framework with the purpose of introducing new rules that aim to enhance the resilience of individual banks, and of the full financial system, to shocks (Keys et al., 2009). Overall, in spite of the growing importance of the macroprudential view of regulation (Acharya et al., 2010, Adrian and Brunnermeier, 2011, Brunnermeier et al., 2009 and Morris and Shin, 2008) that focuses on the stability of the system as a whole and where the cost of regulation for an institution depends on the negative systemic externalities that it may cause, the microprudential approach to regulation remains a key component of the prospective new rules. In other words, the assessment of the riskiness of each institution and how to enhance the ability of each institution to resist shocks are still major regulatory objectives. The microprudential perspective of regulation is clearly stated in the new accord on capital regulation, known as Basel III, that has been published by the Basel Committee on Banking Supervision in December 2010 and contains the key elements of the new regulatory framework. The Basel III Accord states how “The reforms strengthen bank level, or microprudential regulation, which will help raise the resilience of individual banking institutions to periods of stress” (Basel Committee on Banking Supervision, 2010; p. 2). To this end, the new rules, while aimed at increasing the overall capital requirements for banks above the conventional threshold of 8% by January 2019 and the quality of equity components as cushions against losses, introduce restrictions on bank characteristics in terms of leverage ratios and liquidity provisions. However, whether the regulatory restrictions on these two bank characteristics may indeed be effective in strengthening the resilience of banks to systemic shocks and whether they need to be accompanied by the adoption of other prudential rules remain a matter of discussion (see Hellwig, 2010 and Ibragimov et al., 2011). For instance, several policy initiatives go beyond the framework proposed by the Basel III Accord to focus on the importance of imposing restrictions on bank business models. This is the case of The Dodd–Frank Wall Street Reform and Consumer Protection Act, adopted in the US in July 2010, which introduces restrictions on bank diversification via the adoption of the ‘Volcker rule’.1 Similarly, in the UK the Independent Commission on Banking, established in June 2010, suggests the creation of ring-fence banks which have to focus, exclusively, on retail banking and have to be legally separated from other entities when they belong to a financial group. These banks, and all institutions deemed to be systemically relevant, are then required to respect stricter prudential requirements than in the Basel III Accord. Several other proposals have advocated instead the introduction of prudential rules based on bank size (see Dermine and Schoenmaker, 2010). These proposals range from the adoption of a cap which limits the size of banks to the implementation of capital surcharges for large and complex banks as their resilience to shocks is critical for the stability of the whole financial system. In line with this argument, the Basel Committee (2011) has imposed higher capital standards on large, systemically important banks while the Dodd–Frank Act puts systemically important financial institutions, including all banking organisations with total assets greater than $50 billion, under the special supervision of the Federal Reserve, and states the possibility to apply additional capital surcharges on these institutions. Notably, while these regulatory initiatives are generally motivated by the difficulties faced by the largest financial institutions during the recent turmoil, they appear in sharp contrast with the policy followed by several regulatory authorities during the crisis. Essentially, regulators, by encouraging the acquisition of failing banks by large banking firms in an attempt to limit the impact of financial distresses, have favoured the formation of even larger and more complex financial institutions. For instance, US regulators promoted the mergers of Bank of America with Merrill Lynch and Countrywide, and J.P. Morgan Chase with Bear Stearns while in the UK, Lloyd TSB, one of the worldwide biggest banks, acquired the failing HBOS in September 2008 and achieved a final size equal to one-third of the UK’s savings and mortgage market. This paper identifies which bank characteristics offer a shelter from systemic shocks and compares the relative effects of several hypothetical prudential rules on a bank’s risk exposure for an extensive sample of listed banks across 17 European countries.2 The current analysis contributes to the existing literature in several ways. First, the paper utilises a novel empirical approach, based on contingent claim analysis and the Merton (1974) distance to default model (see Gropp and Moerman, 2004 and Gropp et al., 2006), to estimate how the risk of failure of a bank changes due to systemic shocks. The approach proposed here is consistent with a conventional definition of systemic risk, namely the risk of default of the banking system considered as a whole (see Acharya and Yorulmazer, 2007 and Acharya and Yorulmazer, 2008). Second, the analysis contributes to the debate on the re-regulation of the banking industry by showing that the prudential rules prospected by the Basel III Accord, though useful, need to be accompanied by additional restrictions on banks. In particular, we show that imposing regulatory constraints on bank size appears the most effective tool, ceteris paribus, to reduce the default risk of a bank given systemic events. Third, we exploit the cross-country dimension of the European banking industry to derive regulatory implications on how to design a size cap on banks. More precisely, by jointly analysing the influence played by bank absolute and systemic size, measured via the ratio between bank total assets and country GDP ( Brown and Dinç, 2011), we conclude that such a regulatory intervention should focus on bank absolute size and be country-specific with smaller European countries requiring smaller banks. Finally, we test whether micropudential restrictions on bank size, and other bank characteristics, are also beneficial for macroprudential regulation by analysing their influence on a bank’s contribution to systemic risk. 3 In particular, we show that this contribution might be contained by restrictions on bank size as it tends to increase when banks become relatively larger compared to their domestic economies. The rest of this paper is structured as follows. The second section frames the contributions of this paper in the context of the existing literature. The third section describes the sampling criteria and the sample size. The fourth section presents the methodology employed to construct the measures of risk and offers some comparative figures with respect to more conventional measures of risk. The fifth section discusses the empirical results on the determinants of a bank’s exposure to systemic shocks and assesses whether prudential rules on bank size needs to be related to the size of the economy. The sixth section tests the macroprudential implications of our analysis by looking at how the factors driving a bank’s exposure to systemic shocks influence a bank’s contribution to systemic risk. After having discussed the possible negative effects that might be produced by size restrictions in banking in section seven, the eighth section offers conclusions.

This paper has analysed, within the European context, the determinants of the risk that banks fail under systemic shocks utilising a novel empirical approach based on contingent claim analysis and the Merton (1974) distance to default model. Overall, while the results support the introduction of leverage and liquidity requirements, as in the Basel III Accord, they also show that several bank characteristics that are not at the centre of the new regulatory landscape are key determinants of the risk that a bank fails from systemic shocks. The risk exposure of banks, both in normal and extreme systemic conditions, increases with size, the share of non-interest income activities and the growth of earning assets. Furthermore, the comparative analysis of the impact of different bank characteristics on bank exposure to shocks shows that, ceteris paribus, the Basel III rules are likely to be less effective than imposing a cap on bank absolute size. The design of any size restrictions appears, however, to be related to the size of the economy in which a bank is operating. More precisely, as the risk exposure of a bank increases with both absolute and systemic size (defined in relative terms with respect to the size of the economy), and in spite of the integration process of the financial industry in Europe, any regulatory intervention on size needs to be country-specific with smaller European economies needing smaller banks. Next, we demonstrate that the strengthen of individual bank stability obtained via size restrictions is accompanied by a reduction of the contribution to systemic risk for banks which are relatively large compared to the domestic economy. These results have relevant implications for the literature on the determinants of the optimal bank size that has generally assumed the perspective of the individual institution without any consideration for the systemic context (Krasa and Villamil, 1992 and Cerasi and Daltung, 2000). By contrast, the current paper highlights the importance of incorporating in any decision model of the optimal bank size the costs that a larger size produces in terms of exposure to systemic shocks and the linkages with the overall size of the economy. In sum, how to design a regulatory restriction on bank size does not appear an easy task for regulators, although the benefits in terms of bank resilience to shocks that, ceteris paribus, are associated to such a regulatory restriction seem particularly pronounced. The difficulties posed by such a regulatory intervention, and the importance of bank size for the exposure to systemic shocks, might favour the adoption of prudential rules specifically designed for large and complex financial institutions starting from those that the Financial Stability Board has promoted in terms of capital surcharge.