Payment System and Bank Systemic Risk

36 Pages Posted: 5 Jul 2024

See all articles by Giovanni Cardillo

Giovanni Cardillo

University of Bologna - Department of Management; Yunus Social Business Centre

Nico Lauridsen

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Giuseppe Torluccio

University of Bologna - Department of Management; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Date Written: September 25, 2024

Abstract

This paper investigates the critical role of payment systems in transmitting system risk in the European banking sector during the last pandemic. Using a dataset of 67 EU banks from 2017 to 2022, we provide novel and affirmative evidence that the payment system is a significant conduit for shock propagation. Our analysis documents that banks exposed to the payment system (hereafter, PSRI banks) are more likely to contribute to systemic risk during the COVID-19 pandemic. We also highlight the underlying mechanism into force: PSRI banks demonstrate greater vulnerability to macroeconomic fluctuations and experience liquidity pressures, particularly when heavily reliant on short-term funding. As a result, investors charge higher risk premiums on these banks due to their increased exposure to economic downturns. However, our study emphasizes that interbank and wholesale markets represent important sources of resilience for PSRI banks. Specifically, PSRI banks with greater reliance on interbank and wholesale funding exhibit comparatively lower systemic risk, thus reducing their exposure to shocks. Overall, our findings suggest that during economic shocks, the interbank and wholesale markets help mitigate disruptions and vulnerabilities within the payment system, maintaining stability and fostering resilience.

Keywords: payment systems, systemic risk, COVID-19

Suggested Citation

Cardillo, Giovanni and Lauridsen, Nico and Torluccio, Giuseppe, Payment System and Bank Systemic Risk (September 25, 2024). Available at SSRN: https://ssrn.com/abstract=4885517 or http://dx.doi.org/10.2139/ssrn.4885517

Giovanni Cardillo (Contact Author)

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
Bologna, Bologna 40126
ITALY

Yunus Social Business Centre ( email )

Viale Filippo Corridoni, 20
Forlì, 47121
Italy

Nico Lauridsen

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Giuseppe Torluccio

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
40126 Bologna
Italy
+39 051 2098085 (Phone)

HOME PAGE: http://WWW.SA.UNIBO.IT

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

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