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Bank Complexity, Governance, and Risk

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Abstract

Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the the costs of bank resolution when organizations fail, the effect of complexity on BHCs' broader risk profiles is less well understood. Business, organizational, and geographic complexity can engender explicit trade-offs between the agency problems that increase risk and the diversification, liquidity management, and synergy improvements that reduce risk. The outcomes of such trade-offs may depend on bank governance arrangements. We test these conjectures using data on large U.S. BHCs for the 1996-2018 period. Organizational complexity and geographic scope tend to provide diversification gains and reduce idiosyncratic and liquidity risks while also increasing BHCs' exposure to systematic and systemic risks. Regulatory changes focused on organizational complexity have significantly reduced this type of complexity, leading to a decrease in systemic risk and an increase in liquidity risk among BHCs. While bank governance structures have, in some cases, significantly affected the buildup of BHC complexity, better governance arrangements have not moderated the effects of complexity on risk outcomes.

Suggested Citation

  • Ricardo Correa & Linda S. Goldberg, 2020. "Bank Complexity, Governance, and Risk," International Finance Discussion Papers 1287, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1287
    DOI: 10.17016/IFDP.2020.1287
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    Cited by:

    1. Kilian Huber, 2020. "Are Bigger Banks Better? Firm-Level Evidence from Germany," Working Papers 2020-172, Becker Friedman Institute for Research In Economics.
    2. Martynova, Natalya & Vogel, Ursula, 2021. "Banks' complexity-risk nexus and the role of regulation," Discussion Papers 14/2021, Deutsche Bundesbank.
    3. Elizaveta Kamaraeva, 2020. "Bank Complexity and Risk," Russian Journal of Money and Finance, Bank of Russia, vol. 79(3), pages 75-104, September.

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    More about this item

    Keywords

    Bank complexity; Risk taking; Regulation; Too big to fail; Liquidity; Corporate governance; Agency problem; Global banks; Diversification;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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