Which bank is the best in a financial crisis?

A research paper looking at which banks are best able to smooth out fluctuations in the economy to avoid a future banking crisis will be presented to the Royal Economic Society’s annual conference in Brighton (26-28 March).

Dr Sotirios Kokas, from the Essex Business School, worked with academics from Glasgow and Cyprus on an in-depth study looking at data from 8,477 banks in 129 countries between 1992 and 2015.

They found that during a recession, the smaller, more competitive banks, and very big banking institutions – the ‘superpower’ banks - are better at helping to manage pressures in the economy. But during boom times, the big banks are the best.

“We looked at which banks are more likely to smooth financial shocks through their prudence in lending during booms or via their ability to increase (or at least not decrease) lending during economic downturns.

“We found that banks with higher market power (but not ‘superpower’) are more likely than other banks to smooth shocks and reduce the build-up of risk during booms, associated with rising deposits.

“ By contrast, more competitive and ‘superpower’ banks are more likely to smooth shocks during economic downturns, associated with falling deposits, but they can make the situation worse when deposits are rising.”

The paper Which Banks Smooth and at What Price is one of a number of Essex papers being presented at the conference at the University of Sussex.