Central bank independence and systemic risk

We investigate the relationship of central bank independence and banks’ systemic risk measures. Our results support the case for central bank independence, revealing that central bank independence has a robust, negative, and significant impact on the contribution and exposure of a bank to systemic risk. Moreover, the impact of central bank independence is similar for the stand-alone risk of individual banks. Secondarily, we study how the central bank independence affects the impact of selected country and banking system indicators on these systemic measures. The results show that central bank independence may exacerbate the effect of a crisis on the contribution of banks to systemic risk. However, central bank independence seems to mitigate the harmful effect of a bank’s high market power on its systemic risk contribution.

Sisällysluettelo

Abstract .. 4
1 Introduction .. 5
2 Data, sample, and methodology .. 8
2.1 Sample and data .. 8
2.2 Econometric framework .. 9
2.3 Measures of banks’ systemic risk .. 10
2.3.1 Systemic risk contribution .. 11
2.3.2 Measure of systemic risk exposure .. 16
2.3.3 Banks’ individual or stand-alone risk .. 17
2.4 Central bank independence measures .. 17
3 Main empirical results .. 20
3.1 Base results .. 20
3.2 The impact of central bank independence on systemic risk exposure and stand-alone risk .. 24
3.3 Further evidence on the role of central bank independence on systemic risk contribution .. 26
3.4 Robustness assessment using different proxies for systemic risk contribution .. 30
4 Conclusion .. 34
References .. 35
Appendix .. 40