Systemic risk and financial consolidation: are they related?

Gianni De Nicolo and Myron L. Kwast
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Gianni De Nicolo: https://carey.jhu.edu/faculty/faculty-directory/gianni-de-nicolo-phd

No 2001-33, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The creation of a number of very large and sometimes increasingly complex financial institutions, resulting in part from the on-going consolidation of the financial system, has raised concerns that the degree of systemic risk in the financial system may have increased. We argue that firm interdependencies, as measured by correlations of stock returns, provide an indicator of systemic risk potential. We analyze the dynamics of the stock return correlations of a sample of U.S. large and complex banking organizations (LCBOs) over 1988-1999, and find a significant positive trend in stock return correlations. In addition, we relate firms' return correlations to their consolidation activity. Consolidation at the sample LCBOs appears to have contributed to LCBOs interdependencies. However, consolidation elasticities of correlation exhibit substantial time variation, and likely declined in the latter part of the decade. Thus, factors other than consolidation have also been responsible for the upward trend in return correlations.

Keywords: Risk; Bank mergers (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (15)

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