Novel three-bank model for measuring the systemic importance of commercial banks

a r t i c l e i n f o Keywords: Systemic importance of banks Systemic risk Size of bank Multivariate extreme theory Relaxing the hypothesis on the scale level of a bank, the present paper develops an improved three-bank model for analyzing the relationship between the size and the systemic importance of a bank. The proposed model is more general and more operational compared with other models. By introducing the L function based on the multivariate extreme theory and the systemically important index, the effect of the size on the systemic importance of a bank is analyzed. The size is found to be a necessary but insufficient condition for measuring the sys-temic importance of a bank. The size of a bank plays a critical role in evaluating systemic importance, but when the size reaches a certain threshold, its effect is weakened. The current study has theoretical and practical significance for the recognition and supervision of the systemic importance of banks. In summarizing the lessons of the financial crisis in 2008, the International Monetary Fund (IMF) has cited that one of the roots of the crisis is the insufficient attention provided by the regulatory authorities to risk concentration and systemic risk accumulation resulting from financial innovation (IMF, 2009). Therefore, a reform to enhance systemic risk monitoring and coordinate the international efforts to execute macroprudential supervision should be implemented (BIS et al., 2009). Moreover, a large number of scholars agree that the global financial crisis reflects the defects of microprudential supervision, which only emphasizes a partial equilibrium in the entire financial system without seeking an overall equilibrium (Kashyap et al. stated: " Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called systemwide or macroprudential oversight, would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well. " Hence, the Basel Committee for Banking Supervision (BCBS) has placed a higher capital requirement for systemically important banks, which are asked to hold at least 1% more capital than others through the systemic importance of a financial institution lies in the fact that a total disorder or a serious crisis will ensue when it falls into a liquidity crisis, encounters insolvency, or withdraws from the financial market because of bankruptcy. After the subprime crisis, both the academia and …