How important are large banks in Europe and what are the potential consequences of their rising sizes?

Abstract

The growing trend of major banks and the 2007-2009 financial crisis have opened the discussion over the potential impacts of large banks and the risks that these might pose to national economies. This dissertation examines the evolution of bank sizes as well as its effects on their returns, business model, and market discipline, through the analysis of a sample of financial institutions from the Europe Union for the period between 2001 and 2021. We find that, banks tend to grow systemically larger both at an industry and individual level especially in the periods prior to or after the financial crisis, possibly due to the perceived benefits of the “too-big-to-fail” effect. However, our findings also suggest that, while absolute size has a positive impact on bank returns, systemic size shows no significant relationship with performance, and neither size measures appear to be linked with bank risk either. This suggests that a bank growing to systemically large sizes will not necessarily result in greater returns for the bank’s shareholders. At the same time, we conclude that the “too-big-to-fail” effect tends to generally dominate the “too-big-to-save” effect when it comes to the discipline imposed on banks by the market and its depositors. Despite some evidence suggesting higher sensitivity of systemically large banks’ funding cost to its risk profile, estimates reveal less overall market discipline for large banks in the form of lower interest expenses and higher deposit growth rates.

Date of Award	29 Jun 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Lei Zhao (Supervisor)