Systemic Risk: Is the Banking Sector Special?

Abstract

In this paper, we empirically investigate the degree of systemic risk in the U.S. banking sector versus other industry sectors. We characterize the systemic risk in each sector by the lower tail dependence of stock returns. Our study differs from extant literature in three respects. First, we compare the degree of systemic risk in the banking sector with other sectors in the economy. Second, we analyze how systemic risk depends on the state of the stock market and the economy. Third, we compare the systemic risk in the commercial and the investment banking sectors and also investigate the systemic risk during the recent financial crisis. Our study shows that the systemic risk in the banking sector is significantly larger than in all other sectors of the economy. In particular, it differs from the systemic risk in the insurance sector, the second most strongly regulated financial subsystem. Moreover, the degree of systemic risk for the banking sector is higher under adverse market conditions. Finally, we document a substantial increase of systemic risk during the financial crisis.