IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2001-33.html
   My bibliography  Save this paper

Systemic risk and financial consolidation: are they related?

Author

Listed:
  • Gianni De Nicolo
  • Myron L. Kwast

Abstract

The creation of a number of very large and sometimes increasingly complex financial institutions, resulting in part from the on-going consolidation of the financial system, has raised concerns that the degree of systemic risk in the financial system may have increased. We argue that firm interdependencies, as measured by correlations of stock returns, provide an indicator of systemic risk potential. We analyze the dynamics of the stock return correlations of a sample of U.S. large and complex banking organizations (LCBOs) over 1988-1999, and find a significant positive trend in stock return correlations. In addition, we relate firms' return correlations to their consolidation activity. Consolidation at the sample LCBOs appears to have contributed to LCBOs interdependencies. However, consolidation elasticities of correlation exhibit 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.

Suggested Citation

  • Gianni De Nicolo & Myron L. Kwast, 2001. "Systemic risk and financial consolidation: are they related?," Finance and Economics Discussion Series 2001-33, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2001-33
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/feds/2001/200133/200133abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2001/200133/200133pap.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
    3. anonymous, 1999. "Using subordinated debt as an instrument of market discipline," Staff Studies 172, Board of Governors of the Federal Reserve System (U.S.).
    4. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    5. Brian H. Boyer & Michael S. Gibson & Mico Loretan, 1997. "Pitfalls in tests for changes in correlations," International Finance Discussion Papers 597, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bartram, Sohnke M. & Brown, Gregory W. & Hund, John E., 2007. "Estimating systemic risk in the international financial system," Journal of Financial Economics, Elsevier, vol. 86(3), pages 835-869, December.
    2. International Monetary Fund, 2007. "Italy—Assessing Competition and Efficiency in the Banking System," IMF Working Papers 07/26, International Monetary Fund.
    3. J.A. Bikker & A.A.T. Wesseling, 2003. "Intermediation, integration and internationalisation: a survey on banking in Europe," Research Series Supervision (discontinued) 53, Netherlands Central Bank, Directorate Supervision.
    4. Degryse, H.A. & Nguyen, G., 2004. "Interbank Exposures : An Empirical Examination of Systemic Risk in the Belgian Banking System," Discussion Paper 2004-4, Tilburg University, Center for Economic Research.
    5. Yunyong Thaicharoen & Rungporn Roengpitya & Jiranit Chaowalit & Songklod Rastapana, 2009. "Developing the Efficient and Resilient Financial System for Thailand: Lessons from the Crisis and Challenges Ahead," Working Papers 2009-04, Monetary Policy Group, Bank of Thailand.
    6. Grégory Nguyen, 2003. "The Belgian Interbank Market: Interbank Linkages and Systemic Risk," Financial Stability Review, National Bank of Belgium, vol. 1(1), pages 105-123, June.
    7. Andrew Kuritzkes & Til Schuermann & Scott M. Weiner, 2002. "Risk Measurement, Risk Management and Capital Adequacy in Financial Conglomerates," Center for Financial Institutions Working Papers 03-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Schüler, Martin, 2002. "The threat of systemic risk in banking: evidence for Europe," ZEW Discussion Papers 02-21, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Rungporn Roengpitya & Phurichai Rungcharoenkitkul, 2010. "Measuring Systemic Risk And Financial Linkages In The Thai Banking System," Working Papers 2010-02, Monetary Policy Group, Bank of Thailand.
    10. Acharya, Viral V & Yorulmazer, Tanju, 2003. "Information Contagion and Inter-Bank Correlation in a Theory of Systemic Risk," CEPR Discussion Papers 3743, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Risk ; Bank mergers;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2001-33. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio). General contact details of provider: http://edirc.repec.org/data/frbgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.