When Banks Grow Too Big for their National Economies: Tail Risks, Risk Channels, and Government Guarantees

Journal of Financial and Quantitative Analysis, Forthcoming

58 Pages Posted: 28 Nov 2012 Last revised: 22 Jun 2017

See all articles by Jens Hagendorff

Jens Hagendorff

University of Edinburgh - Business School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Francesco Vallascas

Durham University

Date Written: March 31, 2017

Abstract

Banks are growing ever larger compared to their national economies. We show that increases in relative bank size (measured as a bank’s liabilities divided by national GDP) are linked to banks displaying higher tail risk. This effect is not entirely due to risk channels that disproportionately expose relatively large banks to systematic tail risks, sovereign risks, or banking crises. Instead, we detect a persistent component in the tail risk of relatively large banks that is bank-specific and connected to government guarantees. Furthermore, as banks grow in relative size, tail risks are shifted to debtholders without wealth gains for shareholders.

Keywords: Banks, Size, Tail Risk, Too-Big-to-Fail, Government Guarantees

JEL Classification: G21, G33, G01

Suggested Citation

Hagendorff, Jens and Keasey, Kevin and Vallascas, Francesco, When Banks Grow Too Big for their National Economies: Tail Risks, Risk Channels, and Government Guarantees (March 31, 2017). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2181926 or http://dx.doi.org/10.2139/ssrn.2181926

Jens Hagendorff (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Francesco Vallascas

Durham University ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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