Common Mutual Fund Ownership and Systemic Risk

Abstract

We examine whether bank connections via common mutual fund ownership serve as a contagion channel affecting the systemic risk of the banking system. We first document that the extent of a bank’s connection with other banks via common ownership increases its contribution to systemic risk. We further find that this association is primarily driven by passive mutual funds. We provide evidence that common passive ownership results in higher systemic risk through two mechanisms: non-discretionary sell-offs of bank stocks and a common pattern of voting. Our findings are also robust to two alternate instrumental variable analyses. This study contributes to the literature by documenting an unintended, macro-level consequence of common mutual fund ownership.