Keywords: Systemic risk, banks, consolidation
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
Full paper (3136 KB PDF)
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Last update: August 7, 2001