The Two Faces of Interbank Correlation

K. Schaeck, C.F. Silva Buston, W.B. Wagner

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Abstract

Abstract: We decompose the correlation of bank stock returns into a systemic risk component and a component arising from diversi cation activities. Estimation for U.S. Bank Holding Companies (BHCs) shows the diversification component to be large and positively related to BHC performance during the crisis of 2007-2009. This suggests that it is important to distinguish between the two sources of interbank correlations when quantifying systemic risk at banks. Our decomposition also permits us to estimate the marginal gains from diversfication, which turn out to be rapidly declining with bank size. Since large banks are additionally found to display high levels of the systemic risk component, they are hence predominantly exposed to the undesirable source of interbank correlation.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages31
Volume2013-077
Publication statusPublished - 2013

Publication series

NameCentER Discussion Paper
Volume2013-077

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Keywords

  • systemic risk
  • interbank correlation
  • diversification

Cite this

Schaeck, K., Silva Buston, C. F., & Wagner, W. B. (2013). The Two Faces of Interbank Correlation. (CentER Discussion Paper; Vol. 2013-077). Tilburg: Economics.