Paolo Siciliani and Daniel Norris
Asset managers make it more convenient for savers to diversify their investments in stock markets. They are also in a better position to monitor the managers of firms in their portfolios, even if they adopted a passive investment strategy. However, it has been argued that competition might be weakened when firms competing in concentrated industries, such as airlines, share the same small number of institutional investors as their top shareholders.
In this respect, the US banking sector has come under the spotlight, with the top shareholders of the largest US deposit-taking institutions being the same few largest institutional investors (Fig. 1).
Figure 1: Common ownership across large US banks
Figure 2: Common ownership across large UK banks
Looking at the largest UK retail banks (thus excluding Nationwide Building Society), the degree of common ownership is not as pronounced, in particular, thanks to the presence of large shareholders without an exposure to other banks (as depicted by the blank regions, see Fig. 2). These ‘solo’ shareholders might oppose any attempt by common shareholders to induce a softening of competitive rivalry.
On a separate note, what does common ownership across systemic banks mean for financial stability, if anything? Besides the contentious argument that weaker competition is good for financial stability, as higher profit margins make banks more conservative, common ownership also entails common exposure to contagion effects. Therefore, these large institutional shareholders could have strong incentives to reduce moral hazard faced by managers and also facilitate commonly owned banks to raise new equity during time of financial distress. In principle, this should be good for financial stability.
Paolo Siciliani and Daniel Norris work in the Bank’s Policy Strategy & Implementation Division.
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Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.