Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence

This paper investigates how banks, as a group, react to macroeconomic risk and uncertainty; more specifically, it examines the relationship between bank systemic risk and changes and disruptions in economic conditions. Adopting the methodology of Beaudry et al. (2001), we introduce a new estimation procedure based on EGARCH to refine the framework developed by Baum et al. (2002, 2004, 2009) and Quagliariello (2007, 2009), and we analyze the relationship in the current industry context-i.e., in the context of market-based banking. Our results confirm that banks tend to behave more homogeneously vis-à-vis macroeconomic uncertainty. In particular, we find that both the cross-sectional dispersion of loans-to-assets and the cross-sectional dispersion of non-interest income share shrink during slow growth episodes, and particularly during financial crises, when the resilience of the banking system is at its lowest. More importantly, our main findings indicate that the cross-sectional dispersion of loans-to-assets has increased in the last decade, whereas the cross-sectional dispersion of non-interest income share appears to be more volatile and sensitive to macroeconomic shocks.