Systemic risk in the Scandinavian banking sector

The banking sectors in the Scandinavian countries are highly concentrated, typically undercapitalised and they have suffered through several crises since the 1990s. This article analyses the systemic risk in Denmark, Norway and Sweden focusing on the co-dependence in the tails of equity returns of an individual bank and the overall banking system. We use, partly in a new way, conditional cross-quantilograms (CQs) for this purpose. We find that the CQs are positive and statistically significant in the low and high quantiles indicating that the Scandinavian banks are systemically linked. The low-quantile dependence is relatively stronger compared with the magnitude of dependence in the other quantiles. These results hold even after controlling for equity market volatility and economic policy uncertainty. We further observe that the systemic risk was insignificant from the early-2000 to the outbreak of the global financial crisis (GFC). However, after the GFC and the euro zone crisis, the systemic risk has increased substantially. Finally, we find that bank size has a positive relationship with systemic risk (low-quantile dependence) while return on asset and loan to deposit ratio exhibit a negative influence. Furthermore, these relationships are asymmetric across quantiles.