Abstract: * Although the complexity of global banking institutions is generally thought to contribute to the risk of systemic disruptions, no accepted metric for complexity exists. * To address this gap, this study introduces two broad measures: Organizational complexity captures the number and geographic spread of an institution's affiliates, as well as the levels of ownership linking affiliates; business complexity captures the range of activities conducted within an institution's walls. * Using these measures, the authors assess the complexity of a sample of 170 global banking organizations. They find that complexity cannot be equated with institution size; although affiliate counts are correlated with size, no close relationship exists with other complexity measures. * In addition, the authors conclude that the institutions differ greatly in the number of their affiliates, the complexity of their ownership trees, and the degree of diversification in their business activities. 1. INTRODUCTION The increasing size and complexity of financial institutions has received renewed attention in recent years--prompted in part by the debate over the issue of too-big-to-fail entities. How the size of failing institutions might contribute to systemic disruption is well understood. Complexity, however, is a thornier, less easily defined concept, although it is a natural subject of policy concern given the systemic implications of resolving failing institutions. Resolvability requires successfully executing an orderly liquidation in the event of an organization's distress and default; in the case of complex institutions--many with global reach--such liquidations may be more difficult because a large number of legal entities or legal systems are involved. Concerns over the potential systemic repercussions of disruptions to complex organizations have inspired a number of ideas for preemptive fixes including capping of size, breakup and separation of the institution along business lines, organizational restructuring to limit the cross-border dimension of complexity (this last remedy captured in a proposed Federal Reserve rule to strengthen the oversight of U.S. operations of foreign banks), (1) and efforts to make organizations more robust, including the already-implemented enhanced capital and liquidity requirements for systemically important financial institutions. Other approaches to resolution include the FDIC's Title II Orderly Liquidation Authority approach under the Dodd-Frank Act, whereby financial organizations operating in the United States would do so with a single entry strategy intended to reduce system spillovers from resolution as well as the fiscal consequences of such events. (2) In the context of these initiatives, we note that there is no accepted metric for complexity and that analysis of this issue across broad groups of financial firms is relatively scarce. It is well known that banks have developed broader networks of affiliated banking and nonbanking entities at home and abroad. Herring and Santomero (1990) were among the first to predict such an expansion of financial conglomerates, arguing that it would arise from synergies in the production of financial services and in the consumption of financial services. (3) Twenty years later, Herring and Carmassi (2010) documented how far this trend toward consolidation and conglomeration in financial services had progressed, observing that, by the middle of this century's first decade, large complex financial institutions had hundreds or thousands of subsidiaries. (4) At least half a dozen top U.S. bank holding companies (BHCs) had more than a thousand subsidiaries in 2012, in contrast to a firm with such numbers in 1990, as shown in Chart 1 (Avraham, Selvaggi, and Vickery 2012). The organizational evolution of U.S. BHCs followed an intense process of industry consolidation and substantial acquisitions of nonbank subsidiaries (Cetorelli, McAndrews, and Traina 2014). …
Publication Year: 2014
Publication Date: 2014-12-01
Language: en
Type: article
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Cited By Count: 48
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