Systemic Risk and Financial Consolidation: Are They Related?

26 Pages Posted: 9 Feb 2006

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Myron L. Kwast

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: March 2002

Abstract

We argue that firm interdependencies, as measured by correlations of stock returns, provide an indicator of systemic risk potential. We find a positive trend in stock return correlations net of diversification effects for a sample of U.S. large and complex banking organizations over 1988-99. This finding suggests that the systemic risk potential in the financial sector may have increased. In addition, we find a positive consolidation elasticity of correlations. However, such elasticity exhibits substantial time variation and likely declined in the latter part of the decade. Thus, factors other than consolidation have also been responsible for the upward trend in return correlations.

Keywords: Systemic risk, bank consolidation

JEL Classification: G2

Suggested Citation

De Nicolo, Gianni and Kwast, Myron L., Systemic Risk and Financial Consolidation: Are They Related? (March 2002). IMF Working Paper No. 02/55, Available at SSRN: https://ssrn.com/abstract=879527

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

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Myron L. Kwast

Board of Governors of the Federal Reserve System

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