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

Hagendorff, Jens ORCID: https://orcid.org/0000-0002-3567-7826, Keasey, Kevin and Vallascas, Francesco 2018. When banks grow too big for their national economies: tail risks, risk channels, and government guarantees. Journal of Financial and Quantitative Analysis 53 (5) , pp. 2041-2066. 10.1017/S0022109018000327

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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.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Uncontrolled Keywords:	Banks; Size; Tail Risk; Too-Big-to-Fail; Government Guarantees
Publisher:	Cambridge University Press (CUP)
ISSN:	0022-1090
Date of First Compliant Deposit:	21 June 2017
Date of Acceptance:	21 June 2017
Last Modified:	18 Nov 2023 17:56
URI:	https://orca.cardiff.ac.uk/id/eprint/101625

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