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When Banks Grow Too Big for Their National Economies: Tail Risks, Risk Channels, and Government Guarantees

Published online by Cambridge University Press:  22 August 2018

Jens Hagendorff ,
Kevin Keasey  and
Francesco Vallascas
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Abstract

Banks are growing ever larger compared to their national economies. We show that increases in relative bank size (measured as a bank’s liabilities divided by national GDP) are linked to banks displaying higher tail risk. This effect is not entirely due to risk channels that disproportionately expose relatively large banks to systematic tail risks, sovereign risks, or banking crises. Instead, we detect a persistent component in the tail risk of relatively large banks that is bank-specific and connected to government guarantees. Furthermore, as banks grow in relative size, tail risks are shifted to debtholders without wealth gains for shareholders.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 2041 - 2066
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We are grateful to Paul Malatesta (the editor) and an anonymous reviewer for very helpful suggestions and comments. We thank Allen Berger, Lamont Black, Jaap Bos, Christa Bouwman, Bob DeYoung, Andrea Gamba, Kristopher Gerardi, Paul Glasserman, Simon Johnson (discussant), Stefanie Kleinmeier, Neslihan Ozkan (discussant), Thomas Post, Klaus Schaeck, Stefan Straetmans, Chris Veld, Yulia Veld-Merkoulova (discussant), participants at the 2012 Bank Research Conference at the FDIC, and seminar participants at the University of Bristol, the University of Glasgow, and Maastricht University for helpful suggestions. All remaining errors are our own. A previous version of this paper is titled “Systemic Size, Bank Risk and Systemic Crises.”

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