Thursday, January 10

European bank equity risk: 1995-2006

Quite an interesting paper here, which reviews the changes in bank equity risk after the EMU formed. As expected from classical economic theory, the authors find that the bank equity risk has decreased rapidly. Once you have the same currency, remove barries, flatten regulation and increase cross border trade and cooperation, the systemic risk will reduce.

The interesting exception is Germany and I quote from their conclusion:

While equity risk reduction is apparent in most countries in our sample, an important
exception is the German banking industry, where we observe an increase in bank equity risk an average. The German banking industry is dominated by Sparkassen-Finanzgruppe which
includes savings and Landesbanken. This peculiarity of the German banking system is said to
have limited bank consolidation, lowered market concentration, and facilitated continuing
fragmentation in the market and may well explain the risk increases that we observe in this

Mamiza Haq and Richard Heaney, European bank equity risk: 1995-2006, Journal of International Financial Markets, Institutions and MoneyIn Press, Accepted Manuscript, , Available online 9 January 2008.

We examine changes in bank equity risk following the formation of the Economic
Monetary Union (EMU) in 1999. With the exception of Germany, we observe a decline
in bank risk across euro-zone countries. Total risk decreased for 70% of the euro-zone
banks in our sample with a statistically significant decrease in total risk observed for 51%
of the sample. Similar results are found for idiosyncratic risk and systematic risk. These
results are robust to financial crisis effects and test specification. Moreover, we find some
evidence of a decrease in bank equity risk for a sample of neighbouring non-euro-zone
European countries, consistent with the existence of some spill-over effects.

All this to be taken with a grain of piquant salt!!!

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