Credit Cycles and Financial Stability: From Macro to Micro Evidence
Economic Policy, Applied Economics
Final Report Abstract
The project compiled a new data set of annual balance sheets of more than 11,000 commercial banks across 17 advanced economies since 1870. The new data allowed us to investigate banking industry structure and bank-level dynamics before, during, and after banking crises. We show that a country's largest banks (i.e., the top-5 by assets) typically gain market share in crises, as small banks fail more often or are absorbed, making the largest banks even more dominant after crises. This is despite the fact that the largest banks tend to take more risk before crises (higher loan growth and reduction of capital), suffer greater equity losses in crises, and contract their lending more. Their survival and expansion in crises appear linked both to substantially higher rates of government rescues and to the fact that their deposit flows are more insensitive to bank losses, compared to smaller banks. We find no evidence that large-bank-dominated systems have lower crisis frequency; in fact, conditional on crises, large-bank-dominated systems see more severe economic outcomes. The core findings are consistent with theories of excessive risk taking by too-big-to-fail institutions.
Publications
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Survival of the Biggest: Large Banks and Crises since 1870. SSRN Electronic Journal.
Baron, Matthew; Schularick, Moritz & Zimmermann, Kaspar
