Shocks at Large Banks and Banking Sector Distress: The Banking Granular Residual

60 Pages Posted: 8 Jun 2016

See all articles by Sven Blank

Sven Blank

Deutsche Bundesbank - Research Centre

Claudia M. Buch

Deutsche Bundesbank

Katja Neugebauer

Institute for Applied Economic Research (IAW); University of Tuebingen - Faculty of Economics and Business Administration

Date Written: 2009

Abstract

Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix (2008a) and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2007). We find that positive shocks at large banks reduce the probability of distress of small banks.

Keywords: Banking sector distress, size effects, shock propagation, Granular Residual

JEL Classification: E44, E52, E32, G21

Suggested Citation

Blank, Sven and Buch, Claudia M. and Neugebauer, Katja, Shocks at Large Banks and Banking Sector Distress: The Banking Granular Residual (2009). Bundesbank Series 2 Discussion Paper No. 2009,04. Available at SSRN: https://ssrn.com/abstract=2794027

Sven Blank (Contact Author)

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany

Claudia M. Buch

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Katja Neugebauer

Institute for Applied Economic Research (IAW) ( email )

Ob dem Himmelreich 1
Tubingen, 72074
Germany

University of Tuebingen - Faculty of Economics and Business Administration ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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