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Shocks at large banks and banking sector distress: the banking granular residual

Blank, Sven, Buch, Claudia M. and Neugebauer, Katja (2009) Shocks at large banks and banking sector distress: the banking granular residual. Journal of Financial Stability, 5 (4). pp. 353-373. ISSN 1572-3089

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Identification Number: 10.1016/j.jfs.2008.12.002

Abstract

Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix [Gabaix, X., 2008a. The Granular Origins of Aggregate Fluctuations. Available at SSRN: http://ssrn.com/abstract=1111765] and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2008). We find that positive shocks at large banks reduce the probability of distress of small banks.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-financ...
Additional Information: © 2014 Elsevier B.V.
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 10 Jun 2014 09:10
Last Modified: 20 Sep 2019 01:16
URI: http://eprints.lse.ac.uk/id/eprint/57020

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