Central Bank Independence and Systemic Risk

External Wealth of Nations and Systemic Risk

“…The control variable signs are consistent with empirical literature. Size, proxied by the natural logarithm of total assets denominated in US dollars, amplifies systemic vulnerabilities consistent with Laeven et al (2016), Varotto and Zhao (2018) and Andrieș and Sprincean (2022). Large and complex financial institutions, often deemed as "too-big-to-fail," are more susceptible to being bailed out in case of distress, being an incentive for moral hazard and excessive risk-taking.…”

“…Regarding the factors driving banks' systemic behavior, literature identifies many variables. From the balance sheet perspective, size is an important predictor that amplifies systemic distress (Laeven et al, 2016;Bostandzic and Weiß, 2018;Varotto and Zhao, 2018), together with the lower quality of their loan portfolios (Bostandzic and Weiß, 2018;Andrieș and Sprincean, 2021), whereas better capitalization dampens it (Laeven et al, 2016;Bianchi et al, 2022;Andrieș et al, 2022). Diversification through non-traditional sources of income can go either way (Sedunov, 2016;Brunnermeier et al, 2020;Andrieș and Sprincean, 2021;Karolyi et al, 2022).…”

“…Rather, the characteristics of the regulatory regimes seem to be significant. At the country level, Andrieș et al (2022) provided evidence that a more independent central bank is associated with a lower bank systemic risk, contribution and exposure.…”

“…Individual banks are nested within countries over a specific period, thus generating a strong within-cluster correlation. To account for data hierarchy and to capture potential dependency due to nesting effects, we employed a hierarchical linear modeling (HLM) approach used recently, among others, by Doumpos et al (2015), Mourouzidou-Damtsa et al (2019), andAndrieș et al (2022). In multilevel models, homogeneity is not necessary because they separate the variances attributable to all levels of aggregation.…”

“…Second, we improve our current knowledge of the factors driving systemic fragility. Literature identifies several other determinants of system-wide distress at the bank-levelsuch as size, capitalization, funding structure, income diversification, credit risk ratio, profitability, lending (Laeven et al, 2016;Bostandzic and Weiß, 2018;Varotto and Zhao, 2018;Xu et al, 2019;Brunnermeier et al, 2020;Andrieș and Sprincean, 2021;Andrieș et al, 2022), banking system structure described by competition (Anginer et al, 2014;Silva-Buston, 2019) or concentration (Beck et al, 2006;Beck et al, 2022), and specific macroeconomic characteristics, such as economic freedom, inflation, GDP growth, or central bank independence (Boyd et al, 2001;Weiß et al, 2014;Bostandzic et al, 2018;Andrieș and Sprincean, 2021;Andrieș et al, 2022). Third, we investigate the asymmetric impact of specific (macroeconomic) variables on banks' systemic risk exposure conditional on a country's net foreign creditor status.…”