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CESifo Economic Studies Advance Access published online on August 31, 2009
CESifo Economic Studies, doi:10.1093/cesifo/ifp022
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© The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

In the Quest of Systemic Externalities: A Review of the Literature*

Wolf Wagner{dagger},{ddagger}

{dagger}CentER, European Banking Center, TILEC, Tilburg, The Netherlands.
{ddagger}Department of Economics, Tilburg University, Tilburg, The Netherlands. e-mail: wagner{at}uvt.nl.

We review the banking literature with the view of identifying systemic externalities arising from bank failures. We are particularly interested in how such externalities may depend on the characteristics of the financial system at the time of failure, and on the characteristics of the failing bank itself. We conclude that the majority of the mechanisms in the literature suggest that externalities are higher at times when other banks are failing as well or are close to failure. We discuss the implications for optimal capital requirements. (JEL codes: G01, G21, G28)

Key Words: Banking crisis • systemic risk • welfare • regulation.

*I thank Michiel Bijlsma for his comments.


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