The Role of Shadow Banking and the Systemic Risk in the European Financial System

Abstract

In the aftermath of the 2008 financial crisis, the development of shadow banking has been seen as one of the determinants for the increase of system risk. While diversity within the shadow banking system has been largely overlooked, in this paper we focus on European Monetary Market Funds (MMFs) and Finance Services (FSs) in order to investigate their influence on systemic risk. We evaluate the impact of their accounting and financial variables on systemic risk using the Adrian and Brunnermeier (2016)'s ∆CoVaR measure. The dataset is composed of 476 listed traditional and shadow European banking entities, over the period 2006:12015:4. We find that the size of financial institutions contributes more to systemic risk, in particular for MMFs. Market-to-book value ratio, beta and equity returns volatility play a crucial role in explaining systemic risk for FSs. Finally, for traditional banks, the short-term liability ratio is a key determinant in increasing systemic risk.