US banks' exposure to systematic risk

Abstract

We define and construct the ‘systematic risk exposure’ (SRE), measured between 0–100, for a large sample of 2287 US banks during the period 1993– 2019. The measure shows a steady increase in banks’ exposure to systematic risk; and displays significantly high peaks during episodes of market distress such as the LTCM collapse, the Dotcom bust, the Great Recession and the Eurozone crisis. We also show that the imposition of the Dodd-Frank Act has improved US banks’ capitalization levels but has not curtailed their exposure to systematic risk, which has continued to rise unabated. Among characteristics associated with SRE, we find that bank size is the most significant—both economically and statistically.