Purpose – This paper aims to investigate the drivers of systemic risk and contagion among European banks from 2007 to 2012. The authors explain why some banks are expected to contribute more to systemic events in the European financial system than others by analysing the tail co-movement of banks’ security prices. Design/methodology/approach – First, the authors derive a systemic risk measure from the concepts of marginal expected shortfall and conditional value at risk analysing tail co-movements of daily bank stock returns. The authors then run panel regressions for the systemic risk measure using idiosyncratic bank characteristics and a set of country and policy control variables. Findings – The results comprise highly significant drivers of systemic risk in the European banking sector with important implications for research and banking regulation. Using a set of panel regressions, the authors identify bank size, asset and income structure, loss and liquidity coverage, profitability and several macroeconomic conditions as drivers of systemic risk. Research limitations/implications – Analysing the tail co-movement of security prices excludes a number of “smaller” institutions without publicly listed securities. The other shortfall is that we do not assess the systemic impact of non-bank financial institutions. Practical implications – Regulators have to consider a broad variety of indicators for assessing systemic risks. Existing microprudential-oriented rules are less effective, and policymakers may consider new measures like asset diversification to mitigate systemic risks in the banking system. Originality/value – The authors contribute to existing empirical analyses in three ways. First, they propose a method to identify systemically important banks (SIBs). Second, they develop two measures to assess their potential negative impact on the system. Third, they contribute to the closing of the research gaps by analysing which macroprudential regulations for SIBs are most effective without hampering free market forces.

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This paper investigates the drivers of systemic risk and contagion among European banks. First, we use copulas to estimate the systemic risk contribution and systemic risk sensitivity based on CDS spreads of European banks from 2005 to 2014. We then run panel regressions for our systemic risk measures using idiosyncratic bank characteristics and country control variables. Our results comprise highly significant drivers of systemic risk in the European banking sector and have important implications for bank regulation. We argue that banks which receive state aid and have risky loan portfolios as well as low amounts of available liquid funds contribute most to systemic risk whereas relatively poorly equity equipped banks, mainly engaged in traditional commercial banking with strong ties to the local private sector, headquartered in highly indebted countries are most sensitive to systemic risk.

This paper compares four commonly used systemic risk metrics using data on U.S. financial institutions over the period 2005-2014. The four systemic risk measures examined are the (i) marginal expected shortfall, (ii) codependence risk, (iii) delta conditional value at risk, and (iv) lower tail dependence. Our results demonstrate that the alternative measurement approaches produce very different estimates of systemic risk. Furthermore, we show that the different systemic risk metrics may lead to contradicting assessments about the riskiness of different types of financial institutions. Overall, our findings suggest that systemic risk assessments based on a single risk metric should be approached cautiously.

This paper compares four commonly used systemic risk metrics using data on U.S. financial institutions over the period 2005-2014. The four systemic risk measures examined are the (i) marginal expected shortfall, (ii) codependence risk, (iii) delta conditional value at risk, and (iv) lower tail dependence. Our results demonstrate that the alternative measurement approaches produce very different estimates of systemic risk. Furthermore, we show that the different systemic risk metrics may lead to contradicting assessments about the riskiness of different types of financial institutions. Overall, our findings suggest that systemic risk assessments based on a single risk metric should be approached cautiously.

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