Bank Complexity, Governance, and Risk
48 Pages Posted: 15 Jan 2020
Date Written: December 31, 2019
While complexity in bank holding companies (BHCs) raises the costs of bank resolution when organizations fail, the contributions of complexity to the broader risk profiles of BHCs are less well understood. Complexity can engender explicit tradeoffs between the agency problems that increase risk and the diversification, liquidity management and synergy improvements that reduce risk. Outcomes of these tradeoffs may be dependent on bank governance. Using measures of organizational, business, and geographic complexity, we test these conjectures using data on large US BHCs for the period between 1996 and 2018. Organizational complexity and geographic scope tend to provide diversification gains and reduce idiosyncratic and liquidity risks while also increasing BHC systematic and systemic risks. We also find that regulatory tightenings focused on organizational complexity significantly reduced this complexity, with BHC liquidity risk also increasing and systemic risk decreasing. Bank governance in some cases significantly affected the buildup of BHC complexity, but did not moderate the effects of complexity on risk.
Keywords: Bank complexity, risk taking, regulation, too big to fail, liquidity, corporate governance
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation