![handle is hein.journals/jlbkrg20 and id is 1 raw text is: J Bank Regul (2019) 20:1-33
https:Ildoi.org/lO. 10571s4126 1-018-0064-5
Asset commonality of European banks
Sonia Dissem12
Published online: 15 February 2018
© Macmillan Publishers Ltd., part of Springer Nature 2018
Abstract In this paper, we investigate the notion of asset
commonality. We describe the evolution of asset com-
monality, for 43 European banks over 15 countries, by
comparing the 2011 and 2016 EU-wide stress test report-
ing. We determine the main variables that influence asset
commonality and its evolution. We notice that asset com-
monality can be used as a complementary measure to other
market systemic risk measures. Furthermore, we find that
asset commonality can influence the returns negatively and
the volatility of the bank positively. We also find that some
banks, which have no funding problems or fire sales, have
experienced a decrease in their performance. Asset com-
monality can be seen as an interesting tool than can be used
by regulators.
Keywords Asset commonality - Bank regulation
Systemic risk
JEL Classifications G21 - G28
Introduction
One of the reasons why some financial institutions fail is
related to the contagion process also called domino effect
[1, 2]. Indeed, the financial system has become less hier-
archical, less modular and more interconnected. Therefore,
it became more prone to systemic failure. The popular
® Sonia Dse
sonia.dissem@univ-lille2.fr
LSMRC - EA 4112, University of Lille, 59000 Lille, France
2 Skema Business School Lille, Avenue Willy Brandt,
59777 Euralille, France
contagion was the US subprime crisis, where a lot of sec-
tors and countries faced big losses [3]. Thus, the financial
crisis of 2007-2009 has shown how a collapse of some
financial institutions was followed by worldwide economic
downturn. One of the ways that leads to contagion among
financial institutions is fire sales [4, 5]. Indeed, fire sales
create endogenous risk and are considered as a channel for
loss contagion across asset classes and across financial
institutions holding these assets.
In recent years, theoretical literature is not only related
to the contagion effect on the financial sector but also
related to asset commonality between financial institutions.
Indeed, the linkages among financial institutions are con-
sidered as the condition to create systemic risk. For
instance, we can refer to the speech of the Federal Reserve
Chairman Bernanke at the Conference on Bank Structure
and Competition in 2013: Examples of vulnerabilities
include high levels of leverage, maturity transformation,
interconnectedness, and complexity, all of which have the
potential to magnify shocks to the financial system [6].
To better understand the term asset commonality, we
can interpret it as the common exposures between banks'
portfolios. Asset commonality between banks is a measure
that is not very widespread in the empirical literature. The
systemic risk comes from different structures of asset
commonality among banks [7]. However, the topic of
interconnectedness was investigated by many researchers
and most of them agree that interconnectedness between
banks increases systemic risk. There is a positive and sig-
nificant correlation between interconnectedness and vari-
ous market systemic risk measures [8].
In this paper, we determine the main banking variables
that affect asset commonality results and its evolution. We
also evaluate asset commonality to forecast the actual
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