Integration Among US Banks
60 Pages Posted: 27 Sep 2019 Last revised: 13 Jun 2022
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Integration Among US Banks
Integration Among US Banks
Date Written: June 13, 2022
Abstract
We define ‘integration’ for 2287 US banks from 1993–2019 as the explanatory power of common banking factors in explaining stock returns. Integration has risen steadily, and shows significantly high peaks during financial crises. This is worrisome, since a negative shock to common factors depresses sector-wide returns more intensely when the sector is tightly integrated. The Dodd-Frank Act has improved capital adequacy but has not arrested rising levels of integration. Further, banks’ current integration predicts their instability up to 4 quarters in advance; and during crises, past integration levels explain a healthy (6–7%) variation in US banks’ volatilities.
Keywords: Bank integration; Banking crises; Systemically important banks; Bank risk; Principal component regressions
JEL Classification: G10, G21, G28, C32, C33, C38, C58
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