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Article
Publication date: 28 January 2021

Mohamad Hassan and Evangelos Giouvris

The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification…

Abstract

Purpose

The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification strategies. It also observes determinants of M&A deals criteria, product and market diversification positioning, crisis threshold and other regulatory and market factors.

Design/methodology/approach

This research examines the impact and association between merger announcements and regulatory reforms at bank and system levels by investigating the impact of various bank consolidation strategies on firms’ risks. We estimate beta(s) as an index of financial institutions’ systematic risk. We then develop an index of the estimated equity value loss as the long-rum marginal expected shortfall (LRMES). LRMES contributes to compute systemic risk (SRISK) contribution of these firms, which is the capital that a firm is expected to need if we have another financial crisis.

Findings

Large acquiring banks decrease systemic risk contribution in cross-border M&As with a non-bank financial institution, and witness profitability (ROA) gains, supporting geographic diversification stability. Capital requirements, activity restrictions and bank concentration increase systemic risk contribution in national mergers. Bank mergers with investment FIs targets enhance productivity but impair technical efficiency, contrary to bank-real estate deals where technical efficiency change accompanied lower systemic risk contribution.

Practical implications

Financial institutions are recommended to avoid trapped capital and liquidity by efficiently using local balance sheet and strengthening them via implementing models that clearly set diversification and netting benefits to determine capital reserves and to drive capital efficiency through the clarity on product–activity–geography diversification and focus. This contributes to successful ringfencing, decreases compliance costs and maximises returns and minimises several risks including systemic risk.

Social implications

Policy implications: the adversative properties of bank mergers in respect of systemic risk require strict and innovative monitoring of bank mergers from the bidding level by both acquirers and targets and regulators and competition supervisory bodies. Moreover, emphasis on regulators/governments intervention and role, as it provides a stabilising factor of the markets and consecutively lower systemic risk even if the systematic idiosyncratic risk contribution was significant. However, such roles have to be well planned and scaled to avoid providing motives for banks to seek too-big-too-fail or too-big-to-discipline status.

Originality/value

This research contributes to the renewing regulatory debate on banks sustainable structures by examining the risk effect of bank diversification versus focus. The authors aim to address the multidimensional impacts and risks inherent to M&A deals, by examining the extent of the interconnectedness of M&A and its implications within and beyond the banking sector.

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Article
Publication date: 24 September 2019

Christian Hugo Hoffmann

Systemic risks affect financial market participants in many ways. However, the literature insists firmly that they are and, in fact, should be of little concern to…

Abstract

Purpose

Systemic risks affect financial market participants in many ways. However, the literature insists firmly that they are and, in fact, should be of little concern to (private) banks (as opposed to regulators). The purpose of this paper is to argue for the relevance of systemic risks for private banks as opposed to regulators only by making use of causal loop models as being traditionally used in the discipline of systems dynamics. In contrast to the starting point for all common risk-management frameworks in banks, which is the classification of risks into risk categories, the authors show that risk has been compartmentalized too much and provide a strong case for a really holistic approach.

Design/methodology/approach

Systems thinking, causal loop models and conceptual approach.

Findings

Relevance of systemic risks for private banks as opposed to regulators only. In contrast to the starting point for all common risk-management frameworks in banks, which is the classification of risks into risk categories, the authors show that risk has been compartmentalized too much and provide a strong case for a really holistic approach, which stems from using explanatory models such as causal loop diagrams. On top of that more explanatory models ought to be used for risk management purposes while banks currently rely too much on statistical-descriptive approaches.

Originality/value

Integration of systems thinking into risk management, which is novel: in contrast to the starting point for all common risk-management frameworks in banks, which is the classification of risks into risk categories, the authors show that risk has been compartmentalized too much and provide a strong case for a really holistic approach.

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Article
Publication date: 10 August 2018

Clas Wihlborg

Before providing an overview of the conference with the above title and this Special Issue, this paper aims to present a view of the meaning of systemic risk, factors that…

Abstract

Purpose

Before providing an overview of the conference with the above title and this Special Issue, this paper aims to present a view of the meaning of systemic risk, factors that affect systemic risk and measures of systemic risk. Thereafter, the conference presentations and the papers in this issue are summarized.

Design/methodology/approach

Characteristics and measures of systemic risk are reviewed. Conference papers and presentations are summarized.

Findings

While some aspects of systemic risk of a financial institution can be measured, an important aspect associated with contagion through markets is not easily captured by simple measures.

Originality/value

The conference and the papers in this issue contribute to the policy debate about sources and characteristics of systemic risk.

Details

Journal of Financial Economic Policy, vol. 10 no. 2
Type: Research Article
ISSN: 1757-6385

Keywords

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Article
Publication date: 15 November 2011

Stefan Schwerter

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…

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5398

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Originality/value

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.

Details

Journal of Financial Regulation and Compliance, vol. 19 no. 4
Type: Research Article
ISSN: 1358-1988

Keywords

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Article
Publication date: 29 November 2018

Sushma Priyadarsini Yalla, Som Sekhar Bhattacharyya and Karuna Jain

Post 1991, given the advent of liberalization and economic reforms, the Indian telecom sector witnessed a remarkable growth in terms of subscriber base and reduced…

Abstract

Purpose

Post 1991, given the advent of liberalization and economic reforms, the Indian telecom sector witnessed a remarkable growth in terms of subscriber base and reduced competitive tariff among the service providers. The purpose of this paper is to estimate the impact of regulatory announcements on systemic risk among the Indian telecom firms.

Design/methodology/approach

This study employed a two-step methodology to measure the impact of regulatory announcements on systemic risk. In the first step, CAPM along with the Kalman filter was used to estimate the daily β (systemic risk). In the second step, event study methodology was used to assess the impact of regulatory announcements on daily β derived from the first step.

Findings

The results of this study indicate that regulatory announcements did impact systemic risk among telecom firms. The study also found that regulatory announcements either increased or decreased systemic risk, depending upon the type of regulatory announcements. Further, this study estimated the market-perceived regulatory risk premiums for individual telecom firms.

Research limitations/implications

The regulatory risk premium was either positive or negative, depending upon the different types of regulatory announcements for the telecom sector firms. Thus, this study contributes to the theory of literature by testing the buffering hypothesis in the context of Indian telecom firms.

Practical implications

The study findings will be useful for investors and policy-makers to estimate the regulatory risk premium as and when there is an anticipated regulatory announcement in the Indian telecom sector.

Originality/value

This is one of the first research studies in exploring regulatory risk among the Indian telecom firms. The research findings indicate that regulatory risk does exist in the telecom firms of India.

Details

International Journal of Emerging Markets, vol. 13 no. 5
Type: Research Article
ISSN: 1746-8809

Keywords

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Article
Publication date: 19 July 2013

Sharada Alampalli

The near‐collapse of the world's financial system in 2008 brought into focus significant limitations in the data and analysis tools available to mitigate potential risks

Abstract

Purpose

The near‐collapse of the world's financial system in 2008 brought into focus significant limitations in the data and analysis tools available to mitigate potential risks across the financial system. It has raised calls to provide comprehensive data and adequate tools to identify and relieve systemic risk. In this paper, an infrastructure is proposed to address the need for a new information system in systemic regulation.

Design/methodology/approach

The proposed infrastructure is developed using the Fed's Bank Holding Company Supervision Manual as a guideline. The model uses a data fusion approach that allows integration of inspection data, external data, and other regulatory data of different granularity. A proprietary application known as Decision Making Toolbox (DMT) is being developed with three‐tier architecture.

Findings

The integrated all‐in‐one approach will enhance the efficiency, scope, and quality of studies applied to systemic regulation and will facilitate easy decision making for effective regulation.

Originality/value

This concept integrates data and measures that are needed for systemic regulation. It facilitates easy decision making, by regulators with an integrated all‐in‐one information infrastructure, for effective regulation.

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Article
Publication date: 2 November 2018

Li Li, Mary Ma and Victor Song

The purpose of this paper is to investigate the effects of audit client importance on future bank risk and systemic risk in US-listed commercial banks.

Abstract

Purpose

The purpose of this paper is to investigate the effects of audit client importance on future bank risk and systemic risk in US-listed commercial banks.

Design/methodology/approach

The authors use archival research method.

Findings

The authors mainly find that client importance is negatively related with future bank-specific crash risk and distress risk, and also with sector-wide systemic crash risk and systemic distress risk in the future. The authors also report some evidence that these relations become more pronounced during the crisis period than during the non-crisis period. Moreover, the effect of client importance on systemic risk is found to strengthen in banks audited by Big-N auditors, by auditors without clients who restate earnings, and by auditors with more industry expertise.

Research limitations/implications

These findings contribute to the auditing and systemic risk literature.

Practical implications

This study has implications for regulating the banking industry.

Originality/value

This study provides original evidence on how client importance affects bank-specific risk and systemic risk of the banking industry.

Details

Asian Review of Accounting, vol. 26 no. 4
Type: Research Article
ISSN: 1321-7348

Keywords

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Article
Publication date: 15 August 2016

Sascha Strobl

This study investigates the risk-taking behavior of financial institutions in the USA. Specifically, differences between taking risks that affect primarily the…

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1403

Abstract

Purpose

This study investigates the risk-taking behavior of financial institutions in the USA. Specifically, differences between taking risks that affect primarily the shareholders of the institution and risks contributing to the overall systemic risk of the financial sector are examined. Additionally, differences between risk-taking before, during and after the financial crisis of 2007/2008 are examined.

Design/methodology/approach

To analyze the determinants of stand-alone and systemic risk, a generalized linear model including size, governance, charter value, business cycle, competition and control variables is estimated. Furthermore, Granger causality tests are conducted.

Findings

The results show that systemic risk has a positive effect on valuation and that corporate governance has no significant effect on risk-taking. The influence of competition is conditional on the state of the economy and the risk measure used. Systemic risk Granger-causes idiosyncratic risk but not vice versa.

Research limitations/implications

The major limitations of this study are related to the analyzed subset of large financial institutions and important risk-culture variables being omitted.

Practical implications

The broad policy implication of this paper is that systemic risk cannot be lowered by market discipline due to the moral hazard problem. Therefore, regulatory measures are necessary to ensure that individual financial institutions are not endangering the financial system.

Originality/value

This study contributes to the empirical literature on bank risk-taking in several ways. First, the characteristics of systemic risk and idiosyncratic risk are jointly analyzed. Second, the direction of causality of these two risk measures is examined. Moreover, this paper contributes to the discussion of the effect of competition on risk-taking.

Details

The Journal of Risk Finance, vol. 17 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

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Book part
Publication date: 19 June 2019

Carlo Bellavite Pellegrini, Laura Pellegrini and Emiliano Sironi

Systemic risk has been one of the most interesting issues in banking and financial literature during the last years, particularly in evaluating its effects on the…

Abstract

Systemic risk has been one of the most interesting issues in banking and financial literature during the last years, particularly in evaluating its effects on the stability of the whole financial system during crises. Differently from other studies which analyze systemic risk focusing on European countries, we explore the determinant of systemic risk in other regional or continental banking systems, as Latin America. Using the CoVaR approach proposed by Adrian and Brunnermeier (2016), we study the impact of corporate variables on systemic risk on a sample of 30 Latin American banks belonging to seven countries, continuously listed from 2002Q1 to 2015Q4. We investigate the contribution of the corporate variables over different economic periods: the Subprime crisis (2007Q3–2008Q3), the European Great Financial Depression (2008Q4–2010Q2), and the Sovereign debt crisis (2010Q3–2012Q3).

Details

Asia-Pacific Contemporary Finance and Development
Type: Book
ISBN: 978-1-78973-273-3

Keywords

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Article
Publication date: 7 February 2020

Katerina Ivanov and Julia Jiang

The purpose of this paper is to test empirically the impact of asset securitization and sale activities as well as the holdings of sub-prime related securitized products…

Abstract

Purpose

The purpose of this paper is to test empirically the impact of asset securitization and sale activities as well as the holdings of sub-prime related securitized products on the US bank holding companies’ (BHC) exposure to systemic risk.

Design/methodology/approach

This paper adopts a robust econometric method to estimate the conditional value-at-risk as a measure of BHCs' institutional sensitivity to market crushes. Using the data over the period of 2004-2016, the study also uses OLS with robust standard errors and panel estimation with random effects as two alternative estimation techniques to assess the impact of securitization activities on the sensitivity of BHCs to systemic risk.

Findings

Residential mortgage and other forms of securitization activities are positively related to an increase in the US BHCs' sensitivity to systemic distress. The significant cross effects of both securitized loans and holdings of securitized products play a crucial role in determining risks in financial sector.

Originality/value

This study contributes to the empirical literature on the effects of securitization on BHCs' risk exposures in several ways. First, the paper considers the complexity of the bank's risk profile; it focuses on BHCs' individual sensitivity to systemic distress and its dependence on the size of securitization and assets sold activities considering both supply and demand sides of securitization. Second, the time horizon under investigation sheds a light on the relationship between securitization and banks' risk exposures including the pre-crisis, crisis and post-crisis periods.

Details

The Journal of Risk Finance, vol. 21 no. 1
Type: Research Article
ISSN: 1526-5943

Keywords

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