Connectedness between banks
Hale and al. construct a connctedness measure called “First principal components” which is is based solely on the bank holding companies’ stock returns in their sample. As this measure removes neither too much nor too little common variation relative to the stock market indexes, they believe it more accurately reflects the degree of bank connectedness. Their results indicate that the connectedness among banks in recent years has been rising, a trend that other measures have not captured.
Measuring Connectedness between the Largest Banks
By: Galina Hale, Jose A. Lopez, and Shannon Sledz – Federal Reserve Bank of San Francisco
Connectedness between banks and non-bank intermediaries
Cecchetti and Schoenholtz look at the extent to which banks and non-banks hold each other’s liabilities to measure connectedness between banks and non-bank intermediaries. The chart below shows that connectedness has fallen. In 2007, 6.9% of bank assets represented funding to non-banks. By 2017, that share fell to 5.5%. Meanwhile, non-banks’ exposure to banks fell by even more, from 8.4% to 6.3%. They caution though, that the outlook is not completely benign since risky intermediation, such as leveraged loans, has dramatically increased. As a result they suggest that what is needed is a clear framework to monitor, assess, designate, regulate and supervise non-bank intermediaries across the global financial system.
Improving resilience: banks and non-bank intermediaries
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University