Too Big To Fail:Bank Scale And Systemic Risk

Generally believed that systemic risk refers to the probability of losses or breakdowns in an entire banking system as opposed to breakdowns in individual parts or components. Negative externalities of individual risk are the main reason for systemic risk, which mainly reflect in the spillover and contagion effect caused by excessive interconnectedness. The new round of financial crisis compelled people to thinking about how to regulate systemic risk effectively. This paper attempts to explore the formation mechanism of systemic risk from the perspective of risk spillover and contagion, and focus on how bank scale play a role and how to develop appropriate regulatory response to guard against moral hazard of systemically important banks.Firstly, based on dynamic CoVaR model, the paper estimated the contribution to systemic risk of 14 domestic listed banks and explore the formation mechanism of systemic risk and bank scale factors which influence the path. By introducing cross-terms and other means, we find a run on bank credit, corporate credit tightening, fire-sell are potential systemic risk transmission channels and the scale factor, although not directly trigger the risk, but it will significantly increase the risk of channel infection ability. It is the first time empirical explain why the Bank of China, Industrial and commercial Bank of China construction Bank are systemically important than other banks. It also shows the need for national regulatory authorities to set additional regulatory constraints for these large commercial banks.In order to set additional regulatory constraints, the paper use panel regression and found that the size of banks, operating leverage, liquidity conditions, non-interest income have a significant positive impact on the rate of contribution to systemic risk. While regulatory authorities can not directly limit the size of the bank’s business, but they can offset the high systemic risk due to the large size indirectly by reducing the operating leverage and improve liquidity requirements. On the basis of the current, increasing regulatory gradient and using liquidity constraints can effectively optimize the domestic regulatory effect of systemic risk. In addition, with the increase of non-interest income of the banking sector, the risks associated with over-sheet business also need to pay attention.