Authors: Nicola Cetorelli, Beverly Hirtle, Donald Morgan, Stavros Peristiani, and João Santos

The link between financial market concentration and stability is a topic of great interest to policymakers and other market participants. Are concentrated markets—those where a relatively small number of firms hold large market shares—inherently more prone to disruption? This article considers that question by drawing on academic studies as well as introducing new analysis. Like other researchers, the authors find an ambiguous relationship between concentration and instability when a large firm in a concentrated market fails. In a complementary review of concentration trends across a number of specific markets, the authors document that most U.S. wholesale credit and capital markets are only moderately concentrated, and that concentration trends are mixed—rising in some markets and falling in others. The article also identifies market characteristics that might lead to greater, or less, concern about the consequences of a large firm’s exit. It argues that the ease of substitution by other firms in concentrated markets is a critical factor supporting market resiliency.