Why are Big Banks Getting Bigger?

46 Pages Posted: 22 Feb 2016

See all articles by Ricardo T. Fernholz

Ricardo T. Fernholz

Claremont McKenna College - Robert Day School of Economics and Finance

Christoffer Koch

Federal Reserve Bank of Dallas

Date Written: 2016-02-18

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

JEL Classification: C14, C81, E58, G21

Suggested Citation

Fernholz, Ricardo T. and Koch, Christoffer, Why are Big Banks Getting Bigger? (2016-02-18). FRB of Dallas Working Paper No. 1604. Available at SSRN: https://ssrn.com/abstract=2736161 or http://dx.doi.org/10.24149/wp1604

Ricardo T. Fernholz (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

Christoffer Koch

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX Texas 75265-5906
United States

HOME PAGE: http://www.dallasfed.org

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