Systemic Risk, Bank Capital, and Deposit Insurance Around the World

Abstract

We analyze the effect of bank capital, regulation and deposit insurance on the global systemic risk of international banks during the period of 1999-2012. Using a comprehensive panel of large global banks, we identify factors that influence the build-up of systemic risk worldwide across a large set of heterogeneous regulatory and supervisory schemes. We find that higher Tier 1 capital decreases both the exposure and contribution of individual banks to global systemic risk. We also show that deposit insurance schemes that require banks and depositors to bear more financial risk are associated with a more pronounced vulnerability and contribution of individual banks to a crisis of the financial sector. Further results show that bank size and interconnectedness are positively related and competition is negatively related to global financial fragility. In contrast, we find no convincing evidence that a bank’s supervisory environment or non-interest income significantly influence a bank’s exposure or contribution to systemic risk.

Keywords: financial crises, systemic risk, bank regulation, regulatory capital, deposit insurance

JEL Classification: G01, G21