United They Fall: Bank Risk after the Financial Crisis

61 Pages Posted: 13 Jun 2022 Last revised: 9 Aug 2023

See all articles by Priyank Gandhi

Priyank Gandhi

Rutgers University, New Brunswick

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: September 1, 2021

Abstract

We document a three-fold increase in average pairwise correlation in bank equity returns after the global financial crisis, a pattern that is absent in non-bank  financials or non-financial firms. We tease out one key economic channel behind the increased similarity: stress-test regulations that incentivize banks to make similar portfolio decisions. The increase in similarity is especially strong for smaller stress-tested banks such as regional banks. The stress-tested banks increase their exposure to a factor that is orthogonal to the factors that enter the stress test scenario. Our findings raise concerns about ``too-many-to-fail" risk in response to model-based regulations.

Suggested Citation

Gandhi, Priyank and Purnanandam, Amiyatosh, United They Fall: Bank Risk after the Financial Crisis (September 1, 2021). Available at SSRN: https://ssrn.com/abstract=4091626 or http://dx.doi.org/10.2139/ssrn.4091626

Priyank Gandhi

Rutgers University, New Brunswick ( email )

New Brunswick, NJ
United States

Amiyatosh Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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