Integration Among US Banks

Abstract

We study integration among a large sample of 1109 US banks over a quarter-century from 1990–2014. We define a bank’s level of integration (measured in percentages) as the degree of dependence of its stock returns on common national banking factors. We show that the median US bank’s integration has risen from 4.4% in 1990 to 10.1% in 2014. Integration across banks is highly unevenly distributed, appears to obey a power law and for the median “systemically important” bank, corresponding integration levels are 6–10 times higher. The US banking sector is segmented into a small group of “core” banks, strongly integrated with each other; and a large group of weakly integrated banks in the “periphery”. Determinants of US banks’ integration include bank size, its market beta and its idiosyncratic risk, which, all else equal, have a significantly positive impact; while increased reliance on deposit financing and short term financing have a significantly negative impact on integration.

Keywords: Financial Integration, Bank Integration, Bank Risk, Systemically Important Banks, G-SIB, Too-big-to-Fail, Principal Components, Core-Periphery, Power Laws, Banking Networks

JEL Classification: C58, G21, C33