The Hidden Fragility of Large Banks: Asymmetric Connectedness and Systemic Risk

This study investigates whether volatility spillovers among systemically important banks exhibit fundamental asymmetry between positive and negative market shocks. Using daily returns from the world's ten largest banks (July 2010–April 2025), we employ an asymmetric time-varying parameter vector autoregressive (TVP-VAR) connectedness framework to capture dynamic, state-dependent risk transmission. We found substantial empirical evidence that negative shocks generate more persistent spillovers than positive shocks, challenging the symmetric shock assumption underlying most connectedness models and regulatory frameworks. Specific banks exhibit distinct regime-dependent roles, with some systematically amplifying positive shocks during expansions or bullish market states while dampening negative shocks during crises, revealing state-dependent systemic importance that varies across market regimes. These findings extend TBTF and TITF theory by demonstrating that systemic risk is fundamentally asymmetric as banks' transmission roles and vulnerability profiles change with market conditions. The results have direct macroprudential implications, as static systemic importance designations miss dynamic vulnerabilities that emerge during crises, and capital requirements calibrated on symmetric assumptions may be inadequate. We conclude that regime-aware monitoring systems and dynamic capital buffers which adjust with market conditions are necessary for effective financial stability policy. This study advances the theoretical understanding of banking networks and provides practical guidance for regulators implementing state-dependent macroprudential tools.