Abstract: * In the 1980s, the top ten bank holding companies accounted for about 20 percent of total bank assets; that percentage is now above 50 percent. * Bank holding companies have not only grown in size, but they have also become substantially more complex, incorporating a large number of subsidiaries that span the entire spectrum of business activities within the financial sector. * The authors document and analyze banks' organizational evolution, posing questions about the forces driving the industry and firm structures evident today. * The findings suggest that greater complexity is a natural adaptation on the part of banks to a new model of finance oriented to securitization. 1. INTRODUCTION The financial intermediation industry has experienced significant structural transformations over the past twenty to thirty years. Some of these changes are well known. Since the 1980s, for instance, the number of commercial banks operating in the United States fell from about 14,000 to 6,000. Most of this reduction was the result of a well-documented process of consolidation, encouraged in large part by geographic deregulation. Along the way, both the average size of bank holding companies (BHCs) and their market shares increased remarkably. In the 1980s, the top ten BHCs accounted for about 20 percent of total bank assets; that percentage is now above 50 percent. Not only did they grow in size, but the remaining entities also grew substantially in organizational complexity, incorporating a large and growing number of subsidiaries spanning the entire spectrum of business activities within the financial sector. In particular, the transformation of the financial intermediation industry has generated a few banking behemoths, and public debate has focused on ways to regulate such supersized institutions. There are a number of proposed approaches to such regulation, including breakups, size caps, or business activity limits. Other suggestions include enhanced regulations in the form of capital and long-term debt requirements, capital surcharges, stress tests, and improved resolution planning. Although the discussion around the largest entities is certainly important, we suggest that their emergence is part of a larger process that has transformed the financial intermediation industry more broadly. In this paper, we document and analyze how the industry evolved and pose questions about what might have been the forces that drove the industry and firm structures we see today. Despite the intense debate on bank complexity, very little documentation or analysis exists on the dynamics leading to the current industry configuration. In fact, even the meaning and metrics of complexity are debatable; in both comparative and absolute terms, we lack a clear consensus on how to assess an entity's complexity. This problem is important not only from a positive angle, as we strive to understand the economics behind the phenomenon, but also from a normative angle, as we decide on policy measures exclusively for complex institutions. How do we establish how complex entities are? Where do we draw the line across institutions? In this paper, we focus on organizational complexity. (1) We look at organizational structure as gauged by the number and types of subsidiaries organized under common ownership and control. A focus on organizational complexity has multiple implications for policy analysis. It seems, for instance, a natural way to look at issues of resolvability and systemic importance. An institution with more legally organized affiliates, perhaps engaged in diverse business activities or located across geographic borders, presents greater challenges for orchestrating an orderly resolution. Similarly, entities with complex organizational structures may experience systemic events of broader scope: shocks can spread to multiple industries within the financial sector as they propagate across the many affiliates of the organization, perhaps accelerated by cross-default clauses in debt and derivative contracts. …
Publication Year: 2014
Publication Date: 2014-03-01
Language: en
Type: article
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Cited By Count: 36
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