| Summary: | The recent global financial crisis has revived discussions about the optimal 7 size of financial systems, particularly the banking sector. Indeed, several economies with a large banking sector relative to GDP, such as Iceland and Ireland, were hit hard during the crisis. At the same time, however, countries with small, domestically oriented banking sectors, such as those in Greece, Italy and Portugal, also turned out to be vulnerable. These recent experiences suggest that the relationship between banking sector size and financial stability is not clear-cut. This study explores the nexus between banking sector size and financial stability for 38 advanced and emerging economies, by assessing the correlation between the size of the banking system and a number of systemic risk indicators. These indicators correspond to the intermediate objectives for financial stability policy, which have been developed by the European Systemic Risk Board (ESRB, 2013). In addition, we present case studies of Ireland and Greece, two economies with, respectively, a large and a small banking sector that were both hit hard after the global financial crisis.
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