Systemic Risk and Financial Consolidation: Are they Related?

Gianni De Nicolo and Myron Kwast

No 2002/055, IMF Working Papers from International Monetary Fund

Abstract: We argue that firm interdependencies, as measured by correlations of stock returns, provide an indicator of systemic risk potential. We find a positive trend in stock return correlations net of diversification effects for a sample of U.S. Large and Complex Banking Organizations over 1988-99. This finding suggests that the systemic risk potential in the financial sector may have increased. In addition, we find a positive consolidation elasticity of correlations. However, such elasticity exhibits 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: WP; firm; return; large and complex banking organization; Systemic risk; bank consolidation; firm pair; sample firm; return correlation; firm level; dissimilar firm; consolidation elasticity; Stocks; Financial sector risk; Loans; Commercial banks; Global (search for similar items in EconPapers)
Pages: 26
Date: 2002-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (134)

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