How bank size relates to the impact of bank stress on the real economy

We examine whether financial stress at larger banks has a different impact on the real economy than financial stress at smaller banks. Our empirical results show that stress experienced by banks in the top 1% of the size distribution leads to a statistically significant and negative impact on the real economy. This impact increases with the size of the bank. The negative impact on quarterly real GDP growth caused by stress at banks in the top 0.15% of the size distribution is more than twice as large as the impact caused by stress at banks in the top 0.75%, and more than three times as large as the impact caused by stress at banks in the top 1%. These results are broadly informative as to how the stringency of regulatory standards should vary with bank size. They support the idea that, all else equal, the largest banks should be subject to the most stringent requirements while smaller banks should be subject to successively less stringent requirements.