Trends in Financial Market Concentration and their Implications for Market Stability

19 Pages Posted: 26 Mar 2007  

Nicola Cetorelli

Federal Reserve Bank of New York

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department

Donald P. Morgan

Federal Reserve Bank of New York

Stavros Peristiani

Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York

Abstract

The link between financial market concentration and stability is a topic of great interest to policymakers and other market participants. Are concentrated markets - those where a relatively small number of firms hold large market shares - inherently more prone to disruption? This article considers that question by drawing on academic studies as well as introducing new analysis. Like other researchers, the authors find an ambiguous relationship between concentration and instability when a large firm in a concentrated market fails. In a complementary review of concentration trends across a number of specific markets, the authors document that most U.S. wholesale credit and capital markets are only moderately concentrated, and that concentration trends are mixed - rising in some markets and falling in others. The article also identifies market characteristics that might lead to greater, or less, concern about the consequences of a large firm's exit. It argues that the ease of substitution by other firms in concentrated markets is a critical factor supporting market resiliency.

Keywords: Financial stability, financial crises, market concentration, competition, substitutability

JEL Classification: D4, G1, G2, L1

Suggested Citation

Cetorelli, Nicola and Hirtle, Beverly and Morgan, Donald P. and Peristiani, Stavros and Santos, João A. C., Trends in Financial Market Concentration and their Implications for Market Stability. Economic Policy Review, Vol. 13, No. 1, March 2007. Available at SSRN: https://ssrn.com/abstract=975307

Nicola Cetorelli (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5071 (Phone)
212-720-8363 (Fax)

HOME PAGE: http://nyfedeconomists.org/cetorelli/

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7544 (Phone)
212-720-8363 (Fax)

Donald P. Morgan

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

Stavros Peristiani

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7829 (Phone)

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Paper statistics

Downloads
430
Rank
53,743
Abstract Views
2,169