Systemic Risk and Financial Consolidation: Are They Related?

28 Pages Posted: 28 Aug 2001

See all articles by Myron L. Kwast

Myron L. Kwast

Federal Reserve Board - Division of Research & Statistics

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

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: Systemic risk, banks, consolidation

JEL Classification: G21, G28

Suggested Citation

Kwast, Myron L. and De Nicolo, Gianni, Systemic Risk and Financial Consolidation: Are They Related? (July 2001). FEDS Discussion Paper No. 2001-33. Available at SSRN: https://ssrn.com/abstract=279912 or http://dx.doi.org/10.2139/ssrn.279912

Myron L. Kwast (Contact Author)

Federal Reserve Board - Division of Research & Statistics

20th and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2909 (Phone)
202-452-3819 (Fax)

Gianni De Nicolo

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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