Common Block Ownership in Banks and Systemic Risk

• In Event: Bank Failures, Systemic Risk, and Financial Stability

Abstract

This study examines whether bank connections via common blockholders serve as a contagion channel affecting the risk of systemic failure in the banking sector. We posit that bank connections via large investors likely increase the codependence between individual banks which increases the systemic risk of the banking system. Based on both cross-sectional analyses and an instrumental variable approach, we find that the extent of connections to other banks via common blockholders increases individual banks’ contribution to systemic risk, especially during periods of economic recession. In addition, using a difference-in-differences research design, we document that, after the same investor becomes a blockholder in two banks, they become more similar in risk taking and bank operations captured by non-interest income, systematic risk, and stock return co-movement. This study contributes to the literatures on systemic risk, blockholders, and common ownership by documenting an unintended, macro-level, adverse consequence of a supposedly “good” corporate governance mechanism at the micro-level.

Authors

• Michael Iselin, University of Minnesota-Minneapolis

• Scott Liao, University of Toronto

• Haiwen Zhang, Ohio State University