Return Dependence and the Limits of Product Diversification in Financial Firms

Copula‐GARCH models indicate dependence between bank returns and those to insurance underwriting, securities brokerage, and mortgage finance increased during the recent crisis. In contrast, dependence between banks and the broader market was little changed. The crisis‐related jump in return dependence within the financial services sector was greatest for banks that had previously appeared the most independent. Larger banks were also especially prone to increased dependence. These findings raise doubts about the ability of financial conglomerates to diversify effectively and highlight the need for policy progress in methods for resolving such institutions should they become illiquid or insolvent.