This paper finds noninterest income is positively correlated with the total systemic risk for U.S. banks. Decomposing total systemic risk into three components, we find that noninterest income is positively related to a bank’s tail risk, positively related to a bank’s interconnectedness risk, and an insignificantly related to a bank’s exposure to macroeconomic and finance factors. We also find that noninterest income is more volatile and negatively related to interest income. Finally, we find trading and other noninterest income to be positively correlated with systemic risk. Other noninterest income, compared with trading income, has a slightly larger economic impact. (JEL G01, G18, G20, G21, G32, G38) Received October 31, 2019; editorial decision February 3, 2020 by Editor Andrew Ellul

This paper investigates the effectiveness of macroprudential policy to contain the systemic risk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative information on a broad range of instruments which are tracked over their life cycle. Using a dynamic panel framework at a monthly frequency we assess the impact of macroprudential tools and their design on the banks’ systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. In general, the announcements of macroprudential policy actions have a downward effect on bank systemic risk. On average, all banks benefit from macroprudential tools in terms of their individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. Moreover, these tools appear to be most effective for distressed banks. Our results have implications for the optimal design of macroprudential instruments

Shadow insurance is a regulatory loophole exploited by certain insurance groups to increase risk exposure, potentially destabilising the financial system. In this paper, we evaluate the contribution of shadow insurance to systemic risk of the global financial sector using a sample of 215 international insurance entities covering the 2004–2017 period. We detect shadow insurance by examining every reinsurance agreement on the Schedule S filings. Using both ΔCoVaR and SRISK measures, we find that the practice of shadow insurance is a significant driver of global systemic risk

Against the background of the great financial crisis, this paper assesses the merits of bank-based versus market-based financing by exploring the relationship between financial structure and systemic risk. The findings indicate that bank-based financial structures are associated with higher systemic risk than market-based financial structures. In relatively bank-based financial structures, bank financing is found to increase systemic risk while market financing decreases systemic risk. By contrast, in relatively market-based financial structures, bank and market financing do not impact systemic risk. Together, the results signal that market-based financial structures are more resilient to systemic risk

We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the U.S. banking stress tests on banks’ equity prices, credit risk, systematic risk, and systemic risk. We find evidence that stress tests have moved stock and credit markets following the disclosure of stress test results. We also find that banks’ systematic risk, as measured by betas, declined in nearly all years after the publication of stress test results. Our evidence suggests that stress tests affect systemic risk

[First paragraph] The worldwide financial crisis (WFC) of 2007-09 has shown the importance of cross-sectional dependencies of assets, credit exposures and volatility, which can threaten domestic and global financial stability through cascades in financial networks. A correct assessment of company-specific risk has to account for the potential risk spillover effects from other firms (Hautsch et al. 2014). This is because of the intertwined nature of financial markets, which allow the spread of risk throughout the system (Acemoglu et al., 2015). The potential impact of interconnected financial institutions on the entire financial system has been a financial stability concern for central banks and regulators. The need for economic foundations for a systemic risk measure is more than an academic concern since it involves regulators, supervisory authorities and policy-makers (Acharya et al. 2017). This special issue provides a substantial contribution to the systemic risk literature

The tax benefit of interest deductibility encourages debt financing, but regulatory constraints create dependency between bank leverage and asset risk. Using a large international sample of banks this paper shows that banks located in high-tax countries have higher leverage and lower average asset risk-weights. This trade-off is stronger when regulation is more stringent and for banks with less capital. Non-financial firms' leverage and asset risk are positively related to tax rates, as further evidence of the regulatorily induced adjustment of portfolio risk. A difference-in-difference analysis provides support for a causal interpretation of these results. Overall, higher tax rates are positively correlated with systemic risk, suggesting that the lower asset risk does not offset the risk-inducing effect of tax rates on bank leverage