Ricardo Fernholz — Claremont McKenna College, Robert Day School of Economics and Finance 

Title: Why are Banks Getting Bigger?

Abstract: The U.S. banking sector has become substantially more concentrated since the 1990s, raising questions about both the causes and implications of this consolidation. To address these questions, we use nonparametric empirical methods for dynamic power law distributions to analyze the bank size distribution. We show that this distribution is shaped entirely by two factors - the reversion rates (a measure of cross-sectional mean reversion) and idiosyncratic volatilities of assets for different size-ranked banks. Using quarterly data for subsidiary commercial banks and thrifts and their parent bank-holding companies dating back to 1960, we estimate the two factors and show that the main drivers of higher concentration differ for these three types of financial intermediaries. In particular, the greater concentration of U.S. bank-holding company assets is primarily a result of decreased mean reversion, while the greater concentration of both U.S. commercial bank and thrift assets is primarily a result of increased idiosyncratic volatility, especially at the top of the distribution. The contrast of this result suggests that diversification through non-banking activities has reduced the idiosyncratic asset volatilities of the largest bank-holding companies.