Abstract

This paper examines a sample of Japanese regional banks’ exposure to market risk factors and how it affects systemic risk through portfolio composition or revenue source, using Adrian and Brunnermeier’s (2016) CoVaR to proxy for systemic risk. We find evidence of “systemic as a herd” behaviour among Japanese regional banks, as portfolio and revenue components associated with market activities exert positive and significant impacts on systemic risk by generating higher comovement among banks, even though they reduce standalone bank risk through portfolio diversification. Further, the marginal effect of an increase in a given banks’ market-related components on systemic risk is larger when the share of the corresponding components is already high among other banks. Our results have important implications from the macro-prudential perspective.