Banks’ Complexity and Risk: Agency Problems and Diversification Benefits

38 Pages Posted: 28 Sep 2020

See all articles by Diana Bonfim

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Sónia Félix

New University of Lisbon - Nova School of Business and Economics

Date Written: June 30, 2020

Abstract

Bank complexity is often associated with risk, due to moral hazard and agency problems. At the same time, complexity may be linked to diversification and scale economies, thus leading to less risk. In this paper, we provide empirical evidence on the relationship between bank complexity and risk-taking. We find a positive relationship between geographical complexity and bank risk. Banks that operate in more countries, both through banks and non-banks, have riskier balance sheets and more non-performing loans. Further, banks that operate in Africa have higher risk levels due to larger volatility of returns. The link between structural complexity and bank risk is weaker, but generally negative. Our results suggest that moral hazard and agency problems may be more acute when banks operate in many geographies and in emerging market economies. In contrast, the results are consistent with diversification and scale benefits arising from operating in more business areas.

Keywords: bank complexity, risk-taking, diversification

JEL Classification: F23, G21, G23

Suggested Citation

Bonfim, Diana and Félix, Sónia, Banks’ Complexity and Risk: Agency Problems and Diversification Benefits (June 30, 2020). Available at SSRN: https://ssrn.com/abstract=3674141 or http://dx.doi.org/10.2139/ssrn.3674141

Diana Bonfim (Contact Author)

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Sónia Félix

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

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