Research Technical Paper: What drives systemic bank risk in Europe?

A research paper by Michael Wosser identifies the balance sheet variables most closely associated with systemic risk in European banks; bank size, maturity-mismatch, market-to-book ratio and, to a lesser extent, non-performing loans. The primary objective is to clarify the relationship between balance sheet data and the systemic importance / fragility of banks.

The research finds:

• According to one method for assessing risk, two of the most systemically risky banks are relatively large institutions operating in the same EU country. According to another method, likewise the most exposed institutions also operate in a single country. However the most risky jurisdiction changes depending on the risk method.
• Large banks from one particular country appear to pose the greatest systemic threat to the financial system whereas in the event of a systemic crisis emerging, banks located in a different country appear to be most exposed.
• Regardless of which systemic risk measure is used it would appear that the systemic threat posed by European banks to the financial system (and vice versa) is currently (as of mid-2015) low, with pre-financial crisis risk levels presently observed. However, there is little room for complacency and regulators need to gauge systemic risk using multiple systemic risk measures rather than relying upon one exclusively.

The views presented in Research Technical Papers are those of the authors alone and do not necessarily represent the official views of the Central Bank of Ireland.

Research Technical Papers are published on the Central Bank’s website here.