Revisiting the effects of banks’ size on systemic risk: the role of banking sector concentration in the European Banking Union

ABSTRACT

In order to contribute to the literature on bank size as a determinant of systemic risk, this article assesses whether the banks’ size effects on banks’ systemic risk exposure in the European Banking Union could be mitigated/aggravated when the banking sector concentration is taken into account. The results indicate that the banking sector concentration lowers the banks’ size effects on banks’ systemic risk exposure in the European Banking Union. Thus, this article advocates for mergers and acquisitions between banks in the European Banking Union.

KEYWORDS:

• Banks’ size
• banking sector concentration
• systemic risk
• European Banking Union

JEL CLASSIFICATION:

• G21
• G28

Acknowledgments

I am grateful to Daniel Goyeau and the anonymous referee for their very helpful comments on earlier versions of this article. All remaining errors or omissions are mine.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ See Weiß et al. (2014) for a detailed presentation of these papers.

² See Brownlees and Engle (2017) for a detailed presentation of the SRISK.

³ For a threshold C equals to 2%. For a detailed presentation of MES, see Acharya et al. (2010).

⁴ A bank’s share is measured as its total assets divided by the total banking assets of a given country.

⁵ These control variables are based on the literature (e.g. Fina Kamani (2019) and De Jonghe, Diepstraten, and Schepens (2015)).

⁶ The choice of considering only the deposits-taking listed banks is driven by the fact that the SRISK is based on market data, and to ensure that the banks included in my sample had traditional banking activities.

⁷ http://vlab.stern.nyu.edu/. The macroeconomic variables come from the World Bank’s World Development Indicators (WDI).