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posted on 25 June 2017

Bank Asset Concentration Not Necessarily Cause For Worry

from the Dallas Fed

-- this post authored by Ricardo T. Fernholz and Christoffer Koch

U.S. banking assets have become substantially more concentrated within a few large institutions. However, decreasing relative rates of big-bank growth and of idiosyncratic volatility - an indicator of individual bank susceptibility to shocks and a resulting redistribution of assets - suggest a reduction in systemic financial system risk through contagion.

Today, the top 1 percent of U.S. bank holding companies control more than 60 percent of banking system assets. Two decades ago, the share was half that, raising the question of whether policymakers and the public should be concerned about the increase in asset concentration (Chart 1).

The global financial crisis of 2008 - 09 was about the common systemic risk accumulated on the balance sheets of the largest U.S. banks via their common exposure to asset-backed securities involving the U.S. housing market. This analysis considers another potential source of financial instability: entityspecific, idiosyncratic risk.

In the past, single-entity failures such as Continental Illinois National Bank and Trust Co. in 1984 or the near-collapse of the Long-Term Capital Management hedge fund in 1998 raised concerns about the contagion of idiosyncratic shocks and triggered policy responses. This analysis examines idiosyncratic volatility’s role in shaping the bank size distribution and in increasing the risk of contagion from one entity to the other through exposure networks.

[click on image below to continue reading]

Source

https://www.dallasfed.org/~/media/documents/research/eclett/2017/el1707.pdf

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