Econometrics - Angela Vossmeyer (Claremont McKenna College, CA)

Title: Specification of Systemic Risk and Acquisitions
Abstract. We investigate how balance sheet and systemic risk are influenced by acquisitions of financial institutions. A novel econometric model with incidental truncation is developed, where bank closure, the type of closure (e.g., consolidation, distressed merger, or failure), and changes to bank risk are jointly considered and simultaneously estimated using an efficient MCMC algorithm. The multivariate setting proves important to avoid biases from sample selection and ignored correlation among outcomes. Using data on all banks during the Great Depression, we find that risk is largely redistributed through bank mergers and that acquiring institutions are associated with greater increases in systemic risk. Our results provide important insights about the common regulatory solution to marry good banks with bad banks during financial crises.