Methods for Evaluation of Concentration and Interconnectedness in Holdings of Institutional Investors

The Bank of Israel, as part of its function, evaluates the robustness, efficiency, and stability of the financial system. This evaluation is conducted by monitoring activity in the financial system, and one of the challenges faced is the concise presentation of system data, which is also designed to indicate any potential vulnerabilities therein. In this document we present examples of commonly used methods for empirical analysis of assets held by institutional investors. Empirical analysis may point to vulnerabilities in the financial system, and particularly to those resulting from the extent of concentration and interconnectedness therein, which, in case of a shock to the system, may result in the materialization of system-wide contagion risk.