The effect of non-traditional banking activities on systemic risk: Does bank size matter?

This article analyses how the effects of non-traditional banking activities on banks’ exposures to systemic risk differ according to bank size. Through data on European banks, we use the generalized-method-of-moments while taking into account the unobservable common factors between banks. We find that non-traditional banking activities only increase small banks’ exposure to systemic risk; trading activities only increase small banks’ exposure to systemic risk; commissions and fees activities only increase large banks’ exposure to systemic risk. Thus, our findings call for the establishment of a European banking regulation similar to the Glass-Steagall Act for small banks.