Why are big banks getting bigger?

Ricardo Fernholz and Christoffer Koch

No 1604, Working Papers from Federal Reserve Bank of Dallas

Abstract: The U.S. banking sector has become substantially more concentrated since the 1990s, raising questions about both the causes and implications of this consolidation. We address these questions using nonparametric empirical methods that characterize dynamic power law distributions in terms of two shaping factors ? the reversion rates (a measure of crosssectional mean reversion) and idiosyncratic volatilities of assets for different size-ranked banks. Using quarterly data for subsidiary commercial banks and thrifts and their parent bank-holding companies, we show that the greater concentration of U.S. bank-holding company assets is a result of lower mean reversion, a result consistent with policy changes such as interstate branching deregulation and the repeal of Glass-Steagall. In contrast, the greater concentration of both U.S. commercial bank and thrift assets is a result of higher idiosyncratic volatility, yet, idiosyncratic volatility of parent bank-holding company assets fell. This contrast suggests that diversification through non-banking activities has reduced the idiosyncratic asset volatilities of the largest bank-holding companies and affected systemic risk.

Keywords: bank size distributions; bank structure; dynamic power laws; financial stability; non-bank activities; nonparametric methods; systemic risk (search for similar items in EconPapers)
JEL-codes: C14 C81 E58 G21 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-02-18
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:1604

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DOI: 10.24149/wp1604

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