We investigate why some banks are more exposed and contribute more to systemic risk in the global financial system than others. On average, European banks contribute more to global systemic risk than banks in the United States while banks on both continents have a comparable average exposure to systemic crises. In addition to being larger, European banks appear to contribute more to global systemic risk, because of the lower quality of their loan portfolios and their higher relative interconnectedness with the rest of the global financial system. Finally, more stringent capital regulations are found to decrease the average exposure of banks to systemic risk.

We analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises. We find no empirical evidence supporting conjectures that bank size, leverage, non-interest income or the quality of the bank’s credit portfolio are persistent determinants of systemic risk across financial crises. In contrast, our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime. We also confirm for the subprime crisis that the banks’ contribution to moderately bad tail events in the past predicts the financial sector’s crash risk.

This paper analyzes the systemic risk effects of bank mergers to test the “concentration-fragility” hypothesis. We use the marginal expected shortfall as well as the lower tail dependence between a bank’s stock returns and a relevant bank sector index to capture the merger-related change in an acquirer’s contribution to systemic risk. In our empirical analysis of a dataset of international domestic and cross-border mergers, we find clear evidence for a significant increase in the merging banks’, the combined banks’ as well as their competitors’ contribution to systemic risk following mergers, thus confirming the “concentration-fragility” hypothesis.

We use the EBA capital exercise of 2011 as a quasinatural experiment to investigate how capital requirements affect various measures of bank solvency risk. We show that, while regulatory measures of solvency improve, nonregulatory measures indicate a deterioration in bank solvency in response to higher capital requirements. The decline in bank solvency is driven by a permanent reduction in banks’ market value of equity. This finding is consistent with a reduction in bank profitability, rather than a repricing of bank equity due to a reduction of implicit and explicit too-big-too-fail guarantees. We then discuss alternative policies to improve bank solvency.