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This paper aims to investigate the drivers of systemic risk and contagion among European banks from 2007 to 2012. The authors explain why some banks are expected to contribute more to systemic events in the European financial system than others by analysing the tail co-movement of banks’ security prices.

First, the authors derive a systemic risk measure from the concepts of marginal expected shortfall and conditional value at risk analysing tail co-movements of daily bank stock returns. The authors then run panel regressions for the systemic risk measure using idiosyncratic bank characteristics and a set of country and policy control variables.

The results comprise highly significant drivers of systemic risk in the European banking sector with important implications for research and banking regulation. Using a set of panel regressions, the authors identify bank size, asset and income structure, loss and liquidity coverage, profitability and several macroeconomic conditions as drivers of systemic risk.

Analysing the tail co-movement of security prices excludes a number of “smaller” institutions without publicly listed securities. The other shortfall is that we do not assess the systemic impact of non-bank financial institutions.

Regulators have to consider a broad variety of indicators for assessing systemic risks. Existing microprudential-oriented rules are less effective, and policymakers may consider new measures like asset diversification to mitigate systemic risks in the banking system.

The authors contribute to existing empirical analyses in three ways. First, they propose a method to identify systemically important banks (SIBs). Second, they develop two measures to assess their potential negative impact on the system. Third, they contribute to the closing of the research gaps by analysing which macroprudential regulations for SIBs are most effective without hampering free market forces.

The financial crisis 2007‐2009 calls for a regulatory response. A crucial element of this task is the treatment of systemic risk. Basel III gains centre stage in this process. Thus, the purpose of this paper is to evaluate Basel III, examining its ability to reduce systemic risk.

The paper highlights the importance of reducing systemic risk to achieve the goal of overall financial stability. By first focusing on the theoretical foundations of systemic risk, this paper explores and analyzes the crucial aspects of this almost impalpable risk type. It further investigates the current regulation of systemic risk, clearly showing Basel II's inability to reduce it. Then, it evaluates the Basel Committee's efforts to address these weaknesses through Basel III by investigating its incentives and its ability to reduce obvious drawbacks of Basel II as well as systemic risk factors.

The findings show that there are still adjustments necessary. Although the development of Basel III is well advanced, providing some stabilizing incentives, there are still issues calling for closer consideration to counter all Basel II drawbacks and systemic risk factors adequately. These include: a risk‐weighted leverage ratio; a more thorough treatment of procyclicality; adjustments for the NSFR (Net Stable Funding ratio); and most importantly, the mandatory issue to internalize negative externalities from financial institutions, that is, the call for pricing systemic risk.

The paper not only examines the new Basel III framework, as a response to the Financial Crisis 2007‐2009, but also draws attention to specific areas which the Basel Committee and regulators need to focus on more thoroughly.

India’s efforts to achieve large-scale financial inclusion are challenged by growing concerns related to the stability and profitability of the overall banking system. Although a rising dependence on digital finance and the acceptability of wallet-based payments was also visible during the post-demonetisation era and the coronavirus disease 2019 (Covid-19) pandemic, issues related to bank stability and profitability could be addressed through the extension of digital financial services (DFS), making the system more transparent and resilient to internal as well as external perturbations.

The study provides empirical evidence to support the bank digitalisation and extension of DFS to achieve financial inclusion. The impact of digital finance, macroeconomic aspects and microprudential factors (bank specific) on stability is examined for selected Indian banks using quarterly observations spanning 2011Q1–2020Q4. The relationship between banking stability (measured through z-score and Sharpe ratio) is established with digitalisation factors using the instrumental variable regression two-stage least square -based panel regression. Robustness is tested using panel vector autoregression models.

Digital transactions including mobile banking, National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) prove vital and significant in establishing stable banking activity in the Indian context across both public and private banking institutions. Access to broadband services provides a positive impetus in this direction. These issues could be addressed through the extension of DFS making the system more transparent and resilient to internal as well as external perturbations. As an implication, the adoption of innovative means of transaction could empower the financially excluded sections of society.

The novelty of this study is to bring the discussion of digitalisation and bank stability (riskiness) in the Indian context to light. As the first of its kind, this study paves the way for providing an empirical justification for promoting and achieving bank stability through digitalisation in the era of post-demonetisation and Covid-19.

This study aims to demonstrate and measure the impact of liquidity shocks on a bank’s solvency, especially when the bank does not hold sufficient liquid assets.

The proposed model is an extension of Merton’s (1974) model. It assesses the bank’s probability of default over one or two (short) periods relative to liquidity shocks. The shock scenarios are materialised by different net demands for the withdrawal of funds (NDWF) and may lead the bank to sell illiquid assets at a depreciated value. We consider the possibility of second-round effects at the beginning of the second period by introducing the probability of their occurrence. This probability depends on the proportion of illiquid assets put up for sale following the initial shock in different dependency scenarios.

We observe a positive relationship between the initial NDWF and the bank’s probability of default (particularly over the second period, which is conditional on the second-round effects). However, this relationship is not linear, and a significant proportion of liquid assets makes it possible to attenuate or even eliminate the effects of shock scenarios on bank solvency.

The proposed model enables banks to determine the necessary level of liquid assets, allowing them to resist (i.e. remain solvent) different liquidity shock scenarios for both periods (including eventual second-round effects) under the assumptions considered. Therefore, it can contribute to complementing or improving current internal liquidity adequacy assessment processes (ILAAPs).

The proposed microprudential approach consists of measuring the impact of liquidity risk on a bank’s solvency, complementing the current prudential framework in which these two topics are treated separately. It also complements the existing literature, in which the impact of liquidity risk on solvency risk has not been sufficiently studied. Finally, our model allows banks to manage liquidity using a solvency approach.

Several developing economies witnessed a large number of systemic financial and currency crises since the 1980s that resulted in severe economic, social, and political problems. The devastating impact of the 1982 and 1994–1995 Mexican crises, the 1997–1998 Asian financial crisis, the 1998 Russian crisis, and the ongoing financial crisis of 2008–2009 suggests that maintaining financial sector stability through reduction in vulnerability is highly crucial. The world is now witnessing an unprecedented systemic financial crisis originated from the USA in September 2008 together with a deep worldwide economic recession, particularly in developed countries of Europe and North America. This calls for devising and using on a regular basis an appropriate and effective monitoring and policy formulation system for detecting and addressing vulnerabilities leading to crisis. This chapter proposes a macroprudential/financial soundness monitoring, analysis, and remedial policy formulation system that can be used by most developing countries with or without crisis experience as well as with limited data. It also discusses a process for identifying and compiling a set of leading macroprudential/financial soundness indicators. An empirical illustration using Philippines data is presented. There is an urgent need for increased coordination, collaboration, and partnership among central banks, banking and financial market supervision agencies, and ministries of finance, economic, and planning for proper macroprudential monitoring. A high-level national financial stability committee under the auspices of the head of the state as well as a ‘‘regional financial stability board’’ needs to be established to complement and support the activities of an “international stability board.”

This paper aims to investigate the influence of financial development on non-performing loans (NPL).

The model used in this study follows the NPL model of Louzis et al. (2012), Ozili (2015) and Beck et al. (2015).

The findings indicate that financial development, measured as foreign bank presence and financial intermediation, are positively associated with NPLs. Also, bank efficiency, loan loss coverage ratio, competition and banking system stability are inversely associated with NPLs, while NPLs are positively associated with banking crises and bank concentration. In the regional analysis, NPLs are negatively associated with regulatory capital and bank liquidity, implying that banking sectors with greater regulatory capital and liquidity experience fewer NPLs.

National bank regulators/supervisor should not only consider the role that financial development structures play in influencing aggregate NPLs but also ensure that thorough supervision of the lending practices of banks is in place as well as the active monitoring of the financial intermediation process in the country.

The study is the first to use a global sample to examine the direct relationship between NPL and financial development.