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Issues in Bank Risk and TBTF 

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Lescaze
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Elijah Brewer, DePaul University

Is Size Everything?

Asani Sarkar
Federal Reserve Bank of New York
Samuel Antill
Stanford University


We comprehensively account for systemicness by constructing risk factors based on thresh-
old size, interconnectedness (IC), complexity, leverage, and liquidity. We nd that, prior to 2007,
our big-versus-huge threshold size factor TSIZE, constructed from equity returns of large
financial firms, is a sucient statistic for systemicness. The largest 10% of rms by market size
load negatively on it, implying a SIFI discount", while the remaining firms load positively
on TSIZE, implying a SIFI premium." The TSIZE subsidy increases around Fitch Support
Rating changes indicating a higher probability of government support and also after the failure
of Continental Illinois in 1984. However, following Lehman's failure in September 2008, IC
risk becomes more signicant while TSIZE risk collapses, suggesting that the market starts to
discriminate between these risks. Pre-2007 TSIZE loadings are predictive of changes in systemic risk in the time series and the cross-section, forecasting up to 21% of the actual increase
in several systemic risk measures (such as SRISK) in the 5 months following Lehman's failure,
after accounting for size, leverage, and correlation. The results, which survive a wide variety
of robustness checks, indicate that while systemic risk comes in dierent guises, it has a broad
impact on resource allocation by increasing the cost of capital of all but the largest firms.

Are European Banks Still Too-big-to-fail? The Impact of Government Interventions and Regulatory Reform on Bailout Expectations in the European Union

Lea Steinruecke
Centre for European Economic Research (ZEW) and University Mannheim


I investigate the implications of government interventions and regulatory reform on too-big-too-fail expectations in the European banking sector. Evidence from stock returns over the period 1993 to 2016 suggests that large European banks have long benefitted and continue to benefit from implicit government guarantees. I document that investors are willing to accept lower risk-adjusted returns for large bank stocks relative to small bank stocks, because they anticipate that governments absorb part of these stocks’ downside risk during financial crises. Recent regulatory reform introducing bail-in and a common standardized resolution framework for European banks were successful in reducing implicit guarantees at first, but became less credible after the effective implementation of these rules came into question in early 2016.

Bank Sectoral Concentration and (Systemic) Risk: Evidence From a Worldwide Sample of Banks

Thorsten Beck
City University of London and CEPR
Olivier DeJonghe
Tilburg University and National Bank of Belgium
Klaas Mulier
Ghent University and National Bank of Belgium


We propose a new stock return-based methodology to measure three dimensions of banks' sectoral concentration (specialization, differentiation, financial sector exposure). Using these measures for a broad cross-section of banks and countries between 2002 and 2012, we estimate both the short- and long-run relationship between banks' sectoral concentration and banks' performance and stability. We find that bank volatility and systemic risk exposure decrease with banks' sectoral specialization and increase with banks' sectoral differentiation and financial sector exposure. These effects are significantly stronger in the long-run. Moreover, there exists important time and cross-country variation, with effects generally stronger during systemic stress periods.

The Wolves of Wall Street: Managerial Attributes and Bank Business Models

Jens Hagendorff
University of Edinburgh
Anthony Saunders
New York University
Sascha Steffen
Frankfurt School of Finance & Management
Francesco Vallascas
University of Leeds


Compensation and other observable manager characteristics attract increasing levels of scrutiny in the banking industry. We show that observable manager variables only describe a small amount of variation in bank business models. Instead, idiosyncratic manager-specific effects (or ‘styles’) of bank managers explain substantial differences in a bank’s policy choices, risk and performance across banks. We combine manager styles to derive manager profiles that predict managers’ personal risk preferences, board characteristics and whether managers will be appointed as CEO during their careers. Our results suggest that attempts to rein in bank risk-taking by targeting observable manager characteristics will be extremely challenging.
Larry D. Wall
Federal Reserve Bank of Atlanta
Bjorn Imbierowicz
Copenhagen Business School
John V. Duca
Federal Reserve Bank of Dallas
Edward S. Prescott
Federal Reserve Bank of Cleveland
JEL Classifications
  • G2 - Financial Institutions and Services