The Complexity of Bank Holding Companies: a Topological Approach

55 Pages Posted: 6 Sep 2017 Last revised: 9 Sep 2017

See all articles by Mark D. Flood

Mark D. Flood

R. H. Smith School of Business, U. of Maryland

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA); Johns Hopkins University

Robin L. Lumsdaine

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

Jonathan Simon

University of Iowa

Date Written: August 2017

Abstract

Large bank holding companies (BHCs) are structured into intricate ownership hierarchies involving hundreds or even thousands of legal entities. Each subsidiary in these hierarchies has its own legal form, assets, liabilities, managerial goals, and supervisory authorities. In the event of BHC default or insolvency, regulators may need to resolve the BHC and its constituent entities. Each entity individually will require some mix of cash infusion, outside purchase, consolidation with other subsidiaries, legal guarantees, and outright dissolution. The subsidiaries are not resolved in isolation, of course, but in the context of resolving the consolidated BHC at the top of the hierarchy. The number, diversity, and distribution of subsidiaries within the hierarchy can therefore significantly ease or complicate the resolution process. We propose a set of related metrics intended to assess the complexity of the BHC ownership graph. These proposed metrics focus on the graph quotient relative to certain well identified partitions on the set of subsidiaries, such as charter type and regulatory jurisdiction. The intended measures are mathematically grounded, intuitively sensible, and easy to implement. We illustrate the process with a case study of one large U.S. BHC.

Suggested Citation

Flood, Mark D. and Kenett, Dror Y. and Lumsdaine, Robin L. and Simon, Jonathan, The Complexity of Bank Holding Companies: a Topological Approach (August 2017). NBER Working Paper No. w23755. Available at SSRN: https://ssrn.com/abstract=3031726

Mark D. Flood (Contact Author)

R. H. Smith School of Business, U. of Maryland ( email )

College Park
College Park, MD 20742
United States

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA) ( email )

Washington, DC
United States

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Robin L. Lumsdaine

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

Jonathan Simon

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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