The Two Faces of Interbank Correlation

31 Pages Posted: 16 Oct 2017

See all articles by Klaus Schaeck

Klaus Schaeck

University of Bristol

Consuelo Silva Buston

Pontifical Catholic University of Chile - School of Business

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: October 2017

Abstract

Correlations of stock returns across banks are an essential input into systemic risk measures. We demonstrate that such correlations can be decomposed into two parts: a systematic component arising from diversification activities, and a systemic component specific to banks. We find that at U.S. Banking Holding Companies correlations are to a large extent driven by the systematic component. However, applying the decomposition to the Marginal Expected Shortfall (MES), we show that it is the systemic component that predicts bank failure and risk during the Global Financial Crisis. The results suggest that it is important to distinguish between the two sources of correlations when measuring systemic risk at banks.

Suggested Citation

Schaeck, Klaus and Silva Buston, Consuelo and Wagner, Wolf, The Two Faces of Interbank Correlation (October 2017). CEPR Discussion Paper No. DP12363. Available at SSRN: https://ssrn.com/abstract=3053889

Klaus Schaeck (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Consuelo Silva Buston

Pontifical Catholic University of Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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