Realized bank risk during the great recession |
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| Institution: | 1. Bangor University, Bangor Business School, Hen Goleg, Bangor University, College Road, L57 2DG, Bangor, UK;2. European Central Bank, Directorate General Research, Financial Research Division, Sonnemannstraße 20, 60314, Frankfurt am Main, Germany;1. Department of Economics, Carleton University for James, C-870 Loeb Building, 1125 Colonel By Drive, Ottawa, ON K1S 5B6, Canada;2. School of Accounting and Finance, University of Waterloo, 200 University Avenue West, Waterloo, ON N2L 3G1, Canada;1. The U.S. Department of the Treasury, Office of Financial Research, Washington DC. 20220, United States;2. Center for Risk Management Research, UC Berkeley, Berkeley, CA 94720, United States;3. Courant Institute of Mathematical Sciences, New York University, NY 10012, United States;4. Columbia Business School, Columbia University, New York, NY 10027, United States;1. University of South Carolina, Columbia, SC 29208, USA;2. Wharton Financial Institutions Center, Philadelphia, PA 19104, USA;3. European Banking Center, Tilburg, The Netherlands;4. DePaul University, Chicago, IL 60604, USA;5. Texas A&M University, College Station, TX 77843, USA;6. Washington University in St. Louis, St. Louis, MO 63130, USA;1. Warwick Business School, University of Warwick, United Kingdom;2. CEPR, United Kingdom;3. Bank of England, United Kingdom;1. Research Department, Federal Reserve Bank of Philadelphia, USA;2. Research Department, Norges Bank, Oslo, Norway;3. Faculty of Economics and Business, University of Groningen, The Netherlands |
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| Abstract: | We find that certain bank characteristics—aggressive credit growth, less reliance on deposit funding, and size—prior to the 2007?2009 crisis are consistently related to the systemic dimensions of bank risk during the crisis. Exposures to real estate play a major role explaining this relationship: Banks with larger real estate betas exhibited higher levels of systemic risk during the crisis. The impact of real estate betas on systemic risk increases for larger banks, following aggressive credit growth policies in the presence of housing bubbles. We show that the relationship between bank characteristics and risk could also be detected using measures of systemic risk calculated prior to the financial crisis. |
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