The three essays on bank assets : Commonalities and systemic risk

Overview & Synopsis

This thesis analyzes the impact of bank asset commonality on systemic risk. This study examines the impact of asset portfolio overlap on systemic risk in large U.S. BHCs. Results reveal a U-shaped relationship between asset commonality, individual probability of default, and systemic risk among banks. Lower asset commonality is linked to reduced risk, while higher commonality is detrimental to financial stability. Investigating liquid and illiquid assets confirms the U-shaped relationship. Our results further emphasize the importance of maintaining low asset commonality for financial stability during normal and crisis periods, as well as for banks with shorter funding maturities. The second chapter studies the impact of asset commonality on systemic risk under varying degrees of implementation of macroprudential policies using a cross-country sample. The primary objective of macroprudential policy is to reduce bank’s exposure to systemic risk arising from excessive credit growth, correlated failures, and other common exposures. However, the implementation of such policies may inadvertently contribute to an increase in bank common holdings as they attempt to engage in risk-shifting strategies. The findings indicate that asset commonality increases exposure to systemic risk under higher implementation of quantity and financial institution-targeted macroprudential policies. This occurs as banks shift their risks to different asset classes or portfolios, consequently elevating their vulnerability to systemic risk. The third chapter examines the impact of the similarity of banks environmental behavior on systemic risk using a cross-country sample.The findings indicate a U-shaped relationship between the similarity of bank environmental behavior and systemic risk among banks. Our result reveals that the similarity of banks environmental behavior is positively associated with systemic risk under a low environmental policy index. Also, under a low green macroprudential policy, the commonality of banks environmental behavior is associated with higher systemic risk.