Bank Sectoral Concentration and (Systemic) Risk: Evidence from a Worldwide Sample of Banks
70 Pages Posted: 28 Apr 2017 Last revised: 21 Nov 2018
Date Written: July 10, 2018
We propose a novel technique to measure three aspects of banks' sectoral concentration that feature prominently in episodes of intensified (systemic) bank risk: specialization (capturing overexposures), differentiation (capturing indirect connectedness), and financial sector exposure (capturing direct connectedness) and show external validity for these measures. We find that both individual and systemic bank risk decrease withspecialization. Indirect connectedness of banks is particularly (and negatively) related to individual bank risk, whereas direct connectedness of banks is particularly (and positively) related to systemic bank risk. These findings inform the theoretical and policy debate on the relationship between sectoral concentration and banks' stability.
Keywords: bank concentration, sectoral specialization, differentiation, bank risk, systemic stability, factor model
JEL Classification: G01, G21, G28, L5
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