When banks grow too big for their national economies: Tail risks, risk channels, and government guarantees

Jens Hagendorff, Kevin Keasey, Francesco Vallascas

Research output: Contribution to journalArticlepeer-review

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.
Original languageEnglish
Pages (from-to)2041-2066
JournalJournal of Financial and Quantitative Analysis
Volume53
Issue number5
Early online date22 Aug 2018
DOIs
Publication statusPublished - Oct 2018

Keywords

  • banks
  • size
  • tail risk
  • too-big-to-fail
  • government guarantees

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