Bank Herding and Systemic Risk

Abstract

This paper studies the relation between bank herding and financial system stability. I develop a set of bank-specific, time-varying measures of herding in asset, liability, and off-balance sheet (OBS) portfolios and empirically examine the relation between bank herding and systemic risk contribution. I find that for large banks, asset herding is associated with lower, liability herding is associated with higher, and OBS herding does not have a significant relation with systemic risk contribution. During crises, the relation of asset herding is stronger, the relation of liability herding is weaker, and the relation of OBS herding remains insignificant. I find that the “too-many-to-fail” effect contributes to the negative relation between bank herding and systemic risk contribution.

Keywords: bank herding, similarity, systemic risk, financial crises

JEL Classification: G18, G21, G28