AbstractWe examine the effects of banks' client stock ownership structure on their governance mechanism, risk taking, and systemic risk in the financial system. We apply a dyadic level of analysis to provide new insights into the relevance of such cross‐ownership as an effective monitoring mechanism and as a source of interconnectedness between and among financial institutions. Our empirical results indicate that bank–client cross‐ownership of bank stocks is negatively associated with the riskiness of bank holding companies and positively associated with systemic risk. Moreover, the effects of such cross‐ownership on systemic risk are stronger in times of a financial crisis.