Shocks at large banksand banking sector distress:the Banking Granular Residual

Size effects matter in banking. Typically, banking systems are dominated by a smallnumber of large players who are also active in a large range of countries and marketsegments. At the same time, there exist small and often regionally-focused financialinstitutions. This holds also for the German banking system, which is characterized by alower degree of concentration than banking systems in other industrialized countries.In this paper, we explore whether and how the size distribution of banks affects thestability of the German banking system. We are particularly interested in the questionwhether idiosyncratic shocks originating at large banks affect the distress probabilities ofsmall und mid-sized banks. Our empirical analysis of the link between shocks at largebanks and banking distress proceeds in two steps. [...]