The Intrafirm Complexity of Systemically Important Financial Institutions

65 Pages Posted: 12 May 2015 Last revised: 22 Sep 2016

Robin L. Lumsdaine

American University - Department of Finance and Real Estate; National Bureau of Economic Research (NBER)

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). This designation reflects a concern that the failure of any one of them could have dramatic negative consequences for the global economy and is based on “their size, complexity, and systemic interconnectedness”. While the characteristics of “size” and “systemic interconnectedness” have been the subject of a good deal of quantitative analysis, less attention has been paid to measures of a firm’s “complexity.” In this paper we take on the challenges of measuring the complexity of a financial institution by exploring the use of the structure of an individual firm’s control hierarchy as a proxy for institutional complexity. The control hierarchy is a network representation of the institution and its subsidiaries. We show that this mathematical representation (and various associated metrics) provides a consistent way to compare the complexity of firms with often very disparate business models and as such may provide the foundation for determining a SIFI designation. By quantifying the level of complexity of a firm, our approach also may prove useful should firms need to reduce their level of complexity either in response to business or regulatory needs. Using a data set containing the control hierarchies of many of the designated SIFIs, we find that between 2011 and 2013, these firms have decreased their level of complexity, perhaps in response to regulatory requirements.

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). 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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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 )

Hanover, NH 03755
United States

J. Doyne Farmer

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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