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What makes a bank ‘systemically’ important? How should this status be reflected in bank capital and liquidity regulation?

Capital adequacy ratio

Leverage (finance)

Capital (economics)

Leverage (statistics)

Market liquidity

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A bank's systemic importance is not solely determined by its size but also by its interconnectedness with other institutions, as highlighted in . European banks, particularly, have shown strong ties to US banks, emphasizing the global nature of systemic risk. To reflect this, capital and liquidity regulations should consider not only the size of a bank but also its potential to trigger instability in the financial system. Frictions in adjusting capital ratios, especially for large and complex banks, impact their ability to meet regulatory requirements promptly . Implementing regulations that address these frictions and account for interconnectedness can enhance financial stability by mitigating the impact of systemic risks and aiding in the recovery of asset prices post-recessions .

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Open access•Posted Content Does banks' systemic importance affect their capital structure and balance sheet adjustment processes? Yassine Bakkar, Olivier De Jonghe, Amine Tarazi - Show less +2 more 01 Mar 2019-Research Papers in Economics 12 Citations	Systemic importance in banks is reflected in their capital structure adjustments. Frictions differ based on size, complexity, and systemic relevance, impacting regulatory capital ratios and adjustment channels.
Open access•Journal Article•DOI Does banks’ systemic importance affect their capital structure and balance sheet adjustment processes? Yassine Bakkar, Olivier De Jonghe, Amine Tarazi - Show less +2 more 07 Mar 2019-Journal of Banking and Finance 12 Citations	Systemic importance in banks is determined by their size, risk exposure, and contribution to systemic risk. This status should be reflected in capital and liquidity regulations to enhance financial stability.
Open access•Journal Article•DOI Does banks’ systemic importance affect their capital structure and balance sheet adjustment processes? 01 Jun 2023-Journal of Banking and Finance 4 Citations	Systemic importance in banks is determined by size, risk exposure, and contribution to systemic risk. Regulatory capital and liquidity requirements should be tailored to mitigate systemic risks effectively.
Journal Article•DOI Bank capital and liquidity regulation Asako Chiba 25 Mar 2021-Journal of Banking Regulation 2 Citations	Banks are deemed 'systemically' important based on their potential impact on the financial system. Capital and liquidity regulations help mitigate this risk by reducing leverage and aiding asset price recovery.

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What is the difference between systemic and systematic risk in the cryptocurrency market?5 answersSystemic risk in the cryptocurrency market refers to the risk of widespread market failure due to interconnectedness and interdependencies among market participants. On the other hand, systematic risk in the cryptocurrency market pertains to the risk inherent to the entire market or a specific sector, affecting all assets within it. Systemic risk is influenced by factors like the formation and bursting of cryptocurrency bubbles, which can significantly increase risks in related sectors like the energy market. Conversely, systematic risk is more focused on the overall stability and fragility of the cryptocurrency market as a whole, highlighting the market's vulnerability to external shocks and fluctuations. Understanding these distinctions is crucial for investors, regulators, and policymakers in managing and mitigating risks in the cryptocurrency market.

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What is systemic importance in banking?5 answersSystemic importance in banking refers to the significance of a financial institution's potential impact on the overall stability of the financial system. It is crucial for regulators to identify Global Systemically Important Banks (G-SIBs) and monitor their activities closely to mitigate systemic risks. Various methods, such as outranking multicriteria decision aiding approaches and ANOVA-like decomposition methods, have been proposed to measure systemic importance accurately by considering interactions and individual effects of multiple shocks. The systemic importance of a bank is not solely determined by its size but also by factors like interconnections with other banks, exposure to government support, and retail orientation. Understanding systemic importance helps in designing special measures to monitor and ensure the stability of banks that play a significant role in the global financial system.

What are the main causes of systemic banking crises?5 answersThe main causes of systemic banking crises are persistently large departures from the long-run trend in housing and stock markets, financial market risk perception, cycles in real estate and stock markets, and capital inflow bonanzas. Additionally, the collapse of real estate prices can jeopardize banking stability and trigger systemic banking crises. Factors such as the demand for deposits, the level of domestic credit, and banking assets also play a significant role in predicting systemic banking crises. High debt levels of banks and low GDP growth rates of countries are identified as major determinants of banking crises. Furthermore, certain aspects of the regulatory environment, such as restricting the breadth of trading activities permitted to banks, contribute positively towards systemic risk mitigation.

Is the COVID 19 triggered a bank systemic crisis?3 answersThe impact of COVID-19 on the banking system has been analyzed in several studies. The pandemic has created uncertainty and affected both the supply and demand side of the economy, leading to cautious behavior by investors. Banks have become the focus of attention in combating the crisis, and state support measures have been implemented to ensure stability. The pandemic has also resulted in an increase in credit risk, which can constrain banks' ability to lend and create problems in the banking system. The European Central Bank (ECB) has responded to the crisis by implementing various measures, such as reducing bank capital buffers and limiting dividends and bonuses. Bank concentration and capitalization have been found to stabilize banking systems during the pandemic, highlighting the importance of adequate capitalization in enhancing bank stability. Overall, while the COVID-19 pandemic has had a significant impact on the banking system, the response of policymakers and the implementation of support measures have aimed to mitigate the crisis and ensure stability.

Why bank are systemic?5 answersBanks are systemic because of their size, interconnectedness, and risk-taking activities. Size alone is not sufficient to capture a bank's systemic importance. European banks have been identified as the main source of global systemic risk, due to their lower quality loan portfolios and higher interconnectedness with the global financial system. Additionally, large banks create more systemic risk when they have lower capital and less-stable funding, engage more in market-based activities, or are more organizationally complex. Balance sheet variables are weak predictors of banks' contribution to systemic risk compared to market-based variables. Frictions in adjusting capital ratios can also contribute to systemic risk, especially for large, systemic, and complex banks. Therefore, systemic risk is influenced by a combination of factors including size, interconnectedness, risk-taking activities, capital adequacy, and market-based variables.

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