Can Firm Risk Explain the Systemic Risk? Evidence from the US Banking Industry

This paper sheds light on the impact of firms' risk measures on systemic risk. Firm risk, which is captured by the volatility of stock market returns, is also decomposed into systematic and idiosyncratic risk. Using a sample of 2,667 US banks for over 30 years, it is shown that idiosyncratic risk can surge systemic risk, while systematic risk plays a less important role. Results survive a battery of tests, including different systemic risk measures, controlling for causality, and interacting with bank size, market fear and crisis periods. These findings call for regulatory intervention, especially for large firms with high idiosyncratic risk