Are Systemically Important Banks Really “IMPORTANT”

Abstract

The Global Financial Crisis of 2007-2009 saw the collapse of some of the world’s oldest financial institutions and the widespread disruption caused to the financial system and the global economy. The failure to predict this crisis and the potential of “too big to fail” banks to cause long-term economic damage resulted in these banks being classified as Global Systemically Important Banks (G-SIBs) and being subjected to increased regulations and high capital buffers to mitigate systemic risk. The focus of this thesis is on interconnectedness, one of the criteria used to categorize these banks as G-SIBs. Our intention is to point out that equal weightage given to all indicators used to calculate systemic importance results in misidentification of G-SIBs. We investigate the interconnectedness of G-SIBs with the global financial system by analyzing volatility spillovers transmitted by each of these banks to different segments of the global financial market. An empirical study is done on the daily equity returns of all G-SIBs and returns in the global equity, investment-grade bond and high-yield bond markets from 2005-2017. We model volatility as timevarying conditional variance in a multivariate framework using asymmetric BEKK-GARCH parameterization. The results suggest that volatility spillovers arising from G-SIBs are independent of size. Only 13 out of 30 G-SIBs effect two or more financial markets and 5 G-SIBs have no spillovers to any global market. Most of the spillovers transmitted by G-SIBs are negative,