Systemic Risk and Financial Consolidation: Are They Related?

By Gianni De Nicolò, M. Kwast. Social Science Research Network, 2001

268 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/26cb12f44449c8b5b4ab3fc5b214d1e91fac9c87

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Citations in the corpus

Why do some banks contribute more to global systemic risk? (2018, background): “, De Nicolò and Kwast, 2002) argue that consolidation in banking coincides with an increase in systemic risk. Wagner (2010) finds the related, counterintuitive, result that more diversified banks increase systemic risk.”
Insurance, Systemic Risk and the Financial Crisis (2011, background): “19 De Nicolo and Kwast (2001) and Gropp et al. (2004). 20 Buhler and Prokopczuk (2007).”
Systemic Risk Contributions (2011, unknown): “Systemic risk in a financial sector is in essence a joint default event of multiple large institutions, which is captured by the correlations of observable equity returns (Nicolò and Kwast 2002).”
Towards a Macroprudential Framework for Financial Supervision and Regulation? (2003, unknown): “33 See, for instance, De Nicolo and Kwast (2001) for an attempt to estimate the impact of financial consolidation on systematic risk based on stock price information.”
Banking System Stability (2007, unknown): “, de Nicoló and Kwast 2002), none focused on the extreme interdependence we are interested in in the present paper. The idea behind our approach is as follows. We assume that bank stocks are efficiently priced, in that they reflect all publicly available information about (1) individual banks’ asset”
Systemic Risks and the Macroeconomy (2010, methodology): “3.2 Systemic Risks 3.2.1 Defi nitions Following Group of Ten (2001) and De Nicolò and Kwast (2002), we adopt the following defi nitions: Systemic fi nancial risk is the risk that a shock will trigger a loss of economic value or confi dence in the fi nancial system.”
The Effect of the Interbank Network Structure on Contagion and Common Shocks (2013, unknown): “De Nicolo and Kwast (2002) analyze the increase in the correlation between large and complex financial organizations during the 1990s, a development that was further fueled by securitization.”
Bank Competition and Financial Stability : Friends or Foes? (2008, background): “De Nicoló and Kwast (2001) assess the direct and indirect interdependencies of large and complex U.S. banking organizations (LCBO) arising from inter-bank on- and off-balance sheet exposures, including linkages through the payment and settlement systems) by considering the correlation of their…”