Most of the shadow banks (SBs) in India are not listed in stock exchanges; hence, it is a challenge to capture their systemic risk (SR) exposure, which could be quite different from those that are listed. This study aims to find the distinct features of SR of listed and non-listed banks by ascertaining that the quantum of risk emanates from both the groups and to identify the distinct drivers of such risk, which would help policymakers to manage risk with a different perspective. The SR of listed SBs is identified by the Conditional Value at Risk (CoVaR) approach, and the risk of non-listed SBs is identified following the Leave-One-Out (LOO) approach. The bank-specific and macro-factors that influence their SR exposure are identified through the random effect panel regression model with robust check. Over the years, there has been a heightened risk in both categories. The size of the risky segment of SBs in each category is quite different. Distinct firm-specific factors are found responsible for risk build-up. Identifying the risk exposure of the non-listed SBs is an important original contribution that has not been attempted by earlier researchers. Macro-variables as the contributors to the build-up of SR have augmented the existing literature. Further, in the context of any emerging economy, to the best of the authors’ knowledge, this is the first comprehensive work covering both the listed and non-listed SBs.
AcharyaV., BrownleesC., EngleR., PedersenL., & PhilipponT. (2010). How to measure and regulate systemic risk (pp. 1–18). NYU Stern School of Business. https://pages.stern.nyu.edu/~sternfin/vacharya/public_html/measuring_and_regulating_systemic_risk-1.pdf
2.
AcharyaV., EngleR., & RichardsonM. (2012). Capital shortfall: A new approach to ranking and regulating systemic risks. American Economic Review, 102(3), 59–64.
3.
AcharyaV. V. & ThakorA. V. (2016). The dark side of liquidity creation: Leverage and systemic risk. Journal of Financial Intermediation, 28(4), 4–21. https://doi.org/10.1016/j.jfi. 2016.08.004
4.
AdrianT., & BrunnermeierM. K. (2009). CoVaR [Staff Report No. 348]. Federal Reserve Bank of New York.
5.
AdrianT., & BrunnermeierM. K. (2014). CoVaR [Federal Reserve Bank of New York Staff Report No. 348] (rev. ed.). Federal Reserve Bank of New York.
6.
AdrianT., & ShinH. S. (2010). The changing nature of financial intermediation and the financial crisis of 2007–2009. Annual Review of Economics, 2(1), 603–618. https://doi.org/10.1146/annurev.economics.102308.124420
7.
AhmadW., PathakB., & BhanumurthyN. R. (2019). Understanding systemic symptoms of non-banking financial companies. Economic & Political Weekly, 54(13), 59–67.
8.
AllenF., & SantomeroA. M. (1998). On the theory of financial intermediation. Journal of Banking and Finance, 21(2), 1461–1485. https://doi.org/10.1007/BF01388162
9.
ArnoldB., BorioC., EllisL., & MoshirianF. (2012). Systemic risk, macroprudential policy frameworks, monitoring financial systems and the evolution of capital adequacy. Journal of Banking and Finance, 36(12), 3125–3132. https://doi.org/10.1016/j.jbankfin.2012.07.023
10.
BanC., SeabrookeL., & FreitasS. (2016). Grey matter in shadow banking: International organizations and expert strategies in global financial governance. Review of International Political Economy, 23(6), 1001–1033. https://doi.org/10.1080/09692290.2016.1235599
11.
Bellavite PellegriniC., CincinelliP., MeoliM., & UrgaG. (2022). The role of shadow banking in systemic risk in the European financial system. Journal of Banking and Finance, 138(5), 106422. https://doi.org/10.1016/j.jbankfin.2022.106422
12.
BerdinE., & SottocornolaM. (2015). Insurance activities and systemic risk [SAFE Working Paper No. 121]. https://doi.org/10.2139/ssrn.2701821
13.
BisiasD., FloodM., LoA. W., ValavanisS., FloodM., LoA. W., & ValavanisS. (2012). A survey of systemic risk analytics. Annual Review of Economics, 4(1), 1–165.
14.
BostandzicD., & WeißG. N. F. (2018). Why do some banks contribute more to global systemic risk?Journal of Financial Intermediation, 35(3), 17–40. https://doi.org/10.1016/j.jfi. 2018.03.003
15.
BrownleesC., & EngleR. F. (2017). SRISK: A conditional capital shortfall measure of systemic risk. Review of Financial Studies, 30(1), 48–79. https://doi.org/10.1093/rfs/hhw060
16.
ClaessensS., & RatnovskiL. (2014). What is shadow banking? [IMF Working Paper No. WP/14/25]. https://doi.org/10.5089/9781475597349.001
17.
DialloB., & Al-MansourA. (2017). Shadow banking, insurance and financial sector stability. Research in International Business and Finance, 42(5), 224–232. https://doi.org/10.10 16/j.ribaf.2017.04.024
18.
EllisS., SharmaS., & BrzeszczyńskiJ. (2022). Systemic risk measures and regulatory challenges. Journal of Financial Stability, 61(4), 100960. https://doi.org/10.1016/j.jfs.2021.100960
19.
EngleR. F. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroscedasticity models. Journal of Business & Economic Statistics, 20(3), 339–350.
20.
FangL., SunB., LiH., & YuH. (2018). Systemic risk network of Chinese financial institutions. Emerging Markets Review, 35(2), 190–206. https://doi.org/10.1016/j.ememar. 2018.02.003
21.
FerranteF. (2018). A model of endogenous loan quality and the collapse of the shadow banking system. American Economic Journal: Macroeconomics, 10(4), 152–201. https://doi.org/ 10.1257/mac.20160118
22.
Fina KamaniE. (2019). The effect of non-traditional banking activities on systemic risk: Does bank size matter?Finance Research Letters, 30(3), 297–305. https://doi.org/10.1016/j.frl.2018.10.013
23.
FSB. (2021, December16). Global monitoring report on non-bank financial intermediation. https://www.fsb.org/uploads/P161221.pdf
24.
GandhiR. (2014, August). Danger posed by shadow banking systems to the global financial system—The Indian case [Conference Session]. Address at the Indian Council for Research on International Economic Relations Conference on Governance and Development: Views from G20 Countries, Mumbai, Vol. 21, pp. 25–32.
25.
GennaioliN., ShleiferA., & VishnyR. W. (2013). A model of shadow banking. Journal of Finance, 68(4), 1331–1363. https://doi.org/10.1111/jofi.12031
26.
GirardiG., & Tolga ErgünA. (2013). Systemic risk measurement: Multivariate GARCH estimation of CoVaR. Journal of Banking and Finance, 37(8), 3169–3180. https://doi.org/10.1016/j.jbankfin.2013.02.027
27.
HartO., & ZingalesL. (2011). A new capital regulation for large financial institutions. American Law and Economics Review, 13(2), 453–490. https://doi.org/10.1093/aler/ahr001
28.
KannanR., ShanmugamK. R., & BhaduriS. (2019). Non-banking financial companies role in India’s development: A way forward (India Studies in Business and Economics Series). Springer.
29.
KarimalisE. N., & NomikosN. K. (2018). Measuring systemic risk in the European banking sector: A copula CoVaR approach. European Journal of Finance, 24(11), 944–975. https://doi.org/10.1080/1351847X.2017.1366350
30.
KleinowJ., HorschA., & Garcia-MolinaM. (2017). Factors driving systemic risk of banks in Latin America. Journal of Economics and Finance, 41(2), 211–234. https://doi.org/ 10.1007/s12197-015-9341-7
31.
KleinowJ., NellT., & KleinowJ. (2015). Determinants of systemically important banks: The case of Europe. Journal of Financial Economic Policy, 7(4), 446–476. https://doi.org/10.1108/JFEP-07-2015-0042
32.
KosmidouK., KousenidisD., LadasA., & NegkakisC. (2017). Determinants of risk in the banking sector during the European Financial Crisis. Journal of Financial Stability, 33(6), 285–296. https://doi.org/10.1016/j.jfs.2017.06.006
33.
LaevenL., RatnovskiL., & TongH. (2014). Bank size and systemic risk [IMF Staff Discussion Note No. SDN/14/04]. https://www.imf.org/external/pubs/ft/sdn/2014/sdn1404.pdf
34.
LaevenL., RatnovskiL., & TongH. (2016). Bank size, capital, and systemic risk: Some international evidence. Journal of Banking and Finance, 69(8), S25–S34. https://doi.org/ 10.1016/j.jbankfin.2015.06.022
35.
LeeS. J., PosenauK. E., & StebunovsV. (2020). The anatomy of financial vulnerabilities and banking crises. Journal of Banking and Finance, 112(3), 1–52. https://doi.org/10.1016/j.jbankfin.2018.04.013
36.
LiX., & LinJ. (2016). Shadow-banking entrusted loan management, deposit insurance premium, and capital regulation. International Review of Economics and Finance, 41(1), 98–109. https://doi.org/10.1016/j.iref.2015.09.003
LiX., YuH., FangL., & XiongC. (2018). Do firm-level factors play forward-looking role for financial systemic risk: Evidence from China. Pacific Basin Finance Journal, 57, 101074. https://doi.org/10.1016/j.pacfin.2018.10.003
39.
LuttrellD., RosenblumH., & ThiesJ. (2012). Understanding the risks inherent in shadow banking: A primer and practical lessons learned [Staff Papers No. 18, pp. 1–47]. Federal Reserve Bank of Dallas. https://www.lamfin.arizona.edu/fixi/creditmod/papers/LRT12.pdf
40.
LysandrouP. (2020). Financialisation and the limits of circuit theory. Finance and Society, 6(1), 1–18.
41.
Martinez-JaramilloS., PerezO. P., EmbrizF. A., & DeyF. L. G. (2010). Systemic risk, financial contagion and financial fragility. Journal of Economic Dynamics and Control, 34(11), 2358–2374. https://doi.org/10.1016/j.jedc.2010.06.004
42.
MiesM. (2024). Bank opacity, systemic risk and financial stability. Journal of Financial Stability, 70(1), 101211. https://doi.org/10.1016/j.jfs.2023.101211
43.
MohammadS., AsutayM., DixonR., & PlatonovaE. (2020). Liquidity risk exposure and its determinants in the banking sector: A comparative analysis between Islamic, conventional and hybrid banks. Journal of International Financial Markets, Institutions and Money, 66(3), 1–20. https://doi.org/ 10.1016/j.intfin.2020.101196
44.
PaltalidisN., GounopoulosD., KizysR., & KoutelidakisY. (2015). Transmission channels of systemic risk and contagion in the European financial network. Journal of Banking and Finance, 61(12), 36–52. https://doi.org/10.1016/j.jbankfin.2015.03.021
45.
PatroD. K., QiM., & SunX. (2013). A simple indicator of systemic risk. Journal of Financial Stability, 9(1), 105–116. https://doi.org/10.1016/j.jfs.2012.03.002
46.
PozsarZ. (2008). The rise and fall of the shadow banking system. Regional Financial Review, 44, 13–25. https://exunoplures.hu/public/pdf/a-decade-on-money-1.pdf
47.
RBI. (1999). Report on trend and progress of banking in India. https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Trend%20and%20Progress%20of%20Banking%20in%20India#
48.
RBI. (2007). Report on trend and progress of banking in India 2006–7. https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Trend+and+Progress+of+Banking+in+India#
49.
RBI. (2022). Report on trend and progress of banking in India 2021–22. https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Trend+and+Progress+of+Banking+in+India#
RoodmanD. (2009). How to do Xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136. https://doi.org/10.1177/1536867x0900900106
52.
SawyerM., & Veronese PassarellaM. (2017). The monetary circuit in the age of financialisation: A stock-flow consistent model with a twofold banking sector. Metroeconomica-International Review of Economics, 68(2), 321–353. https://doi.org/10.1111/meca.12103
53.
ScholtensB., & WensveenD. Van. (2003). The theory of financial intermediation: An essay on what it does (not) explain [Research Report No. 2003/1]. SUERF Studies, SUERF – The European Money and Finance Forum, pp. 7–53.
54.
SedunovJ. (2016). What is the systemic risk exposure of financial institutions?Journal of Financial Stability, 24(3), 71–87. https://doi.org/10.1016/j.jfs.2016.04.005
55.
SiD. K., & LiX. L. (2022). Shadow banking business and firm risk-taking: Evidence from China. Research in International Business and Finance, 62(4), 101729. https://doi.org/10.1016/j.ribaf.2022.101729
56.
SmagaP. (2014). The concept of systemic risk [Systemic Risk Centre Special Paper No. 5]. The London School of Economics and Political Science, pp. 1–29.
57.
SolomonI. D., & MarshalI. (2015). The intermediation functions of finance companies and economic growth: Issues, theory and empirical evidence from Nigeria. Journal of Finance and Accounting, 3(3), 47–56. https://doi.org/10.12691/jfa-3-3-2
58.
SouzaS. R. S., de SilvaT. C., TabakB. M., & GuerraS. M. (2016). Evaluating systemic risk using bank default probabilities in financial networks. Journal of Economic Dynamics and Control, 66(5), 54–75. https://doi.org/10.1016/j.jedc. 2016.03.003
59.
StolbovM. (2017). Assessing systemic risk and its determinants for advanced and major emerging economies: The case of ΔCoVaR. International Economics and Economic Policy, 14(1), 119–152. https://doi.org/10.1007/s10368-015-0330-2
60.
StroblS., & StroblS. (2016). Stand-alone vs systemic risk-taking of financial institutions. Journal of Risk Finance, 17(4), 374–389. https://doi.org/10.1108/JRF-05-2016-0064
61.
The Danish Systemic Risk Council. (2014, December19). Monitoring of systemic risks, pp. 1–19. https://systemicriskcouncil.dk/media/7051/notat_om_overv_gning_offentliggjort_version_eng.pdf
62.
ThiemannM., MelchesC. R., & IbrocevicE. (2020). Measuring and mitigating systemic risks: How the forging of new alliances between central bank and academic economists legitimize the transnational macroprudential agenda. Review of International Political Economy, 28(6), 1433–1458. https://doi.org/10.1080/09692290.2020.1779780
63.
TianG., LiJ., XueY., & HsuS. (2016). Systemic risk in the Chinese shadow banking system: A sector-level perspective. Emerging Markets Finance and Trade, 52(2), 475–486. https://doi.org/10.1080/1540496X.2016.1110465
64.
WeißG. N. F., BostandzicD., & NeumannS. (2014). What factors drive systemic risk during international financial crises ?Journal of Banking and Finance, 41(4), 78–96. https://doi.org/10.1016/j.jbankfin.2014.01.001
65.
ZeddaS., & CannasG. (2020). Analysis of banks’ systemic risk contribution and contagion determinants through the leave-one-out approach. Journal of Banking and Finance, 112(3), 105160. https://doi.org/10.1016/j.jbankfin.2017.06.008
