The Intrafirm Complexity of Systemically Important Financial Institutions

57 Pages Posted: 12 May 2015 Last revised: 17 Oct 2020

See all articles by Robin L. Lumsdaine

Robin L. Lumsdaine

American University - Department of Finance and Real Estate; Erasmus University Rotterdam (EUR) - Department of Econometrics; National Bureau of Economic Research (NBER); Tinbergen Institute

Daniel Rockmore

Dartmouth College - Department of Mathematics; Dartmouth College - Department of Computer Science

Nick Foti

University of Washington - Department of Statistics

Greg Leibon

Dartmouth College

J. Doyne Farmer

University of Oxford

Date Written: September 19, 2016

Abstract

In November, 2011, the Financial Stability Board, in collaboration with the International Monetary Fund, published a list of 29 “systemically important financial institutions” (SIFIs, now referred to as “globally systemically important banks” or G-SIBs), institutions whose failure, by virtue of “their size, complexity, and systemic interconnectedness”, could have dramatic negative consequences for the global financial system. While “size” and “interconnectedness” have been the subject of much quantitative analysis, less attention has been paid to measuring “complexity.” Yet without a consistent way to measure complexity, there is little guarantee that the designated SIFIs capture the complexity that the FSB is concerned about, and little hope of mitigating the consequences that the FSB warns of. In this paper we propose the structure of an individual firm’s majority-control hierarchy as a proxy for institutional complexity. We demonstrate as a proof-of-concept how this method might be used by bank supervisors, particularly the Federal Reserve under its authority as consolidated supervisor, using a data set containing information on the majority-control hierarchies of many of the designated SIFIs. Our mathematical intrafirm network representation (and various associated metrics we propose) provides a uniform way to compare firms with often very disparate organizational structures -- one that is distinct from a simple size comparison.

Suggested Citation

Lumsdaine, Robin L. and Rockmore, Daniel and Foti, Nick and Leibon, Greg and Farmer, J. Doyne, The Intrafirm Complexity of Systemically Important Financial Institutions (September 19, 2016). Journal of Financial Stability, 2020, Available at SSRN: https://ssrn.com/abstract=2604166 or http://dx.doi.org/10.2139/ssrn.2604166

Robin L. Lumsdaine (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Daniel Rockmore

Dartmouth College - Department of Mathematics ( email )

United States

Dartmouth College - Department of Computer Science ( email )

United States

Nick Foti

University of Washington - Department of Statistics ( email )

Seattle, WA
United States

Greg Leibon

Dartmouth College ( email )

Department of Sociology
Hanover, NH 03755
United States

J. Doyne Farmer

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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