The Janus Face of Bank Geographic Complexity
56 Pages Posted: 27 Apr 2020
Date Written: April 20, 2020
We study the relationship between bank geographic complexity and risk using a unique dataset of 96 global bank holding companies (BHCs) over 2008-2016. From data on the affiliate network of internationally active banking entities, we construct a measure of geographic coverage and complexity for each BHC. We find that higher geographic complexity heightens banks' capacity to absorb local economic shocks, reducing their risk. However, higher geographic complexity is also associated with a higher vulnerability to global shocks and less impact of prudential regulation, increasing their risk. Geographic complexity helps more (with respect to local shocks) and hurts less (with respect to global shocks) if countries' business cycles are misaligned. Large, international regulatory reforms such as the implementation of the GSIB framework and the European Single Supervisory Mechanism reduce bank risk, but geographic complexity weakens this effect. Bank geographic complexity therefore has a Janus face, decreasing some but increasing other aspects of bank risk.
Keywords: bank geographic complexity, bank risk, bank regulation, GSIB
JEL Classification: G21, G28
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