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Edit Comment Close Premium member Presentation Transcript Trends in Financial Market Concentration and TheirImplications for Market Stability : Trends in Financial Market Concentration and TheirImplications for Market Stability By A. ANANT ARUN INTRODUCTION : INTRODUCTION A stable market is one that can endure shocks to supply or demand without collapsing—that is, without experiencing surging (or wildly oscillating) prices or sharply shrinking volumes. Markets can experience shocks to supply or demand from many sources, such as changes in regulation, technological innovation, shifts in demographics and knock-on effects from shocks to other markets or economic sectors. The link between concentration and stability is hard to pin down, so we mostly try to identify the link by breaking it down into parts. The Ambiguous Link between Concentration andStability : The Ambiguous Link between Concentration andStability History certainly suggests a link between market concentration and the severity of market disruption given the distress of a major market supplier. Some of the literature suggests a negative link between market concentration and the probability of firm distress. Concentration Trends : Concentration Trends The basic question is whether the regulatory changes of the 1990s have led to a broad pattern of high and increasing concentration in financial markets. The most noticeable exception is the prime brokerage market, where concentration is high. Underwriting and Financial Services : Underwriting and Financial Services Several markets have seen significant declines in concentration since 1980, most notably the high-yield-debt underwriting and advisory services markets. Since 1990, the pattern across markets has been mixed, with some experiencing increases in measured concentration (equity initial public offerings [IPOs], seasoned equity, etc) and others experiencing declines (bond underwriting and syndicated loans). Prime Brokerage : Prime Brokerage An increasingly important business for investment banks and large commercial banks is prime brokerage. Prime brokerage firms essentially service the hedge fund community. Global Custody : Global Custody The global custody business involves processing trades across countries and safeguarding and servicing financial assets for a variety of large customers (institutional investors, brokers/dealers, and money managers). Typically, the portfolio of assets held by global custodians for their customers includes bonds, equities such as mutual fund holdings, etc. Market Interdependencies : Market Interdependencies The probability of distress for a firm and the severity of market disruption may also be affected by interdependencies across markets. The emergence of large financial superstores in the late 1990’s suggests that financial markets may now be more interrelated. Correlations of Market Shares : Correlations of Market Shares One direct measure of linkages between two markets is the correlation of market shares of individual firms in any two markets. A high positive correlation would signal that firms are likely to have similar market shares in both markets. The Presence of Large Banks in Multiple Markets : The Presence of Large Banks in Multiple Markets Now consider a second and even more direct measure of market interdependency: the extent to which individual firms have high market shares in multiple markets. We find that the number of firms ranking in the top five in multiple markets has not increased since the early 1990s, though the number of firms with multiple top-ten and top twenty market. Prompt Substitution Minimizes Disruptions : Prompt Substitution Minimizes Disruptions Trends in financial market structure yields two main findings:- First, while high and rising concentration is not universal, some markets are indeed highly concentrated. Second, financial markets are becoming more interdependent, and the same set of large institutions is increasingly likely to occupy top rankings in several markets. Comparing Substitutability across Markets : Comparing Substitutability across Markets The numbers for market breadth may not fully capture the extent of likely substitution, however, since small or midsize underwriters may not be able to substitute for top-tier firms. The high turnover ratios in the advisory services and syndicated loan markets also signify major changes in the hierarchy of top-tier underwriters. The Concentration-Substitution Dimension : The Concentration-Substitution Dimension The potential for market instability depends not just on concentration, but also on the potential for prompt substitution. The approach lacks the specificity of the detailed case studies of individual markets might offer it has the advantage of being easy to calculate using available market share information for a wide number of markets. Conclusion : Conclusion This shows that, theoretically, higher concentration may either increase or decrease the probability of a firm leaving the market as a result of distress. The risk or severity of financial instability depends not just on concentration, but also on whether other firms can promptly substitute for an existing firm. THANK YOU : THANK YOU You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.