Risk profiles of financial institutions

This chapter' explores the impact of financial integration on systcm-wide risk profiles of publicly traded European financial institutions. The chapter provides an overview of indicators of banking market penetration, and then assesses whether the benefits of risk diversification arising from integration are reflected in convergence of financial institutions' risk profiles to lower risk levels. It documents the evolution and convergence of risk profiles of publicly traded banks and insurance companies, offering insights into the role of financial integration as a driver of risk profile dynamics. A key finding is that the risk profiles of financial institutions have indeed converged, but not to lower risk levels. Convergence has likely been driven by increased exposures to common financial shocks. Enhanced links stemming from integration of European capital markets may have played a role, as increased exposures have occurred despite the lagging integration of the relevant retail markets. The lack of clear improvement in risk profiles suggests that diversification benefits have been offset by higher risk taking.