Systemic Risk and Financial Consolidation: Are they Related?

Author/Editor:

Gianni De Nicolo ; Myron L. Kwast

Publication Date:

March 1, 2002

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2002/055

Subject:

Banking Commercial banks Financial institutions Financial sector policy and analysis Financial sector risk Loans Stocks Systemic risk

English

Publication Date:

March 1, 2002

ISBN/ISSN:

9781451847635/1018-5941

Stock No:

WPIEA0552002

Pages:

26

Please address any questions about this title to publications@imf.org