Systemic risk contagion within US states

Abstract

Purpose This study aims to examine the systemic risk contagion in banks from 15 US states using extreme shocks in their distance to risk. Design/methodology/approach The authors contemplate a model that inputs co-exceedances in the base US states’ banking sector as the dependent variable and the co-exceedances in other states’ banking sector (along with other underlying variables of a banking system) as the explanatory variables. Findings The authors find smaller states transmit and receive more systemic shocks than their larger counterparts and larger states exhibit a better shock-resisting capacity than their smaller counterparts. The authors also find that bigger shocks are more contagious than the smaller shocks. Originality/value This will be the first paper that will investigate the inner linkage of US states’ banking network using three different distance to risk methods, thus providing timely guidance for regulators.