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The Complexity of Bank Holding Companies: A Topological Approach

Listed author(s):
  • Mark D. Flood
  • Dror Y. Kenett
  • Robin L. Lumsdaine
  • Jonathan K. Simon
Registered author(s):

    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.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23755.

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    Date of creation: Aug 2017
    Handle: RePEc:nbr:nberwo:23755
    Note: CF IFM IO ME TWP
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    1. Robin L. Lumsdaine & Daniel N. Rockmore & Nicholas Foti & Gregory Leibon & J. Doyne Farmer, 2015. "The Intrafirm Complexity of Systemically Important Financial Institutions," Papers 1505.02305, arXiv.org.
    2. Martin Summer, 2013. "Financial Contagion and Network Analysis," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 277-297, November.
    3. Adam M. Kleinbaum & Toby E. Stuart & Michael L. Tushman, 2013. "Discretion Within Constraint: Homophily and Structure in a Formal Organization," Organization Science, INFORMS, vol. 24(5), pages 1316-1336, October.
    4. Kaufman, George G., 2014. "Too big to fail in banking: What does it mean?," Journal of Financial Stability, Elsevier, vol. 13(C), pages 214-223.
    5. Stefania Vitali & James B. Glattfelder & Stefano Battiston, 2011. "The network of global corporate control," Papers 1107.5728, arXiv.org, revised Sep 2011.
    6. Jacopo Carmassi & Richard John Herring, 2013. "Living wills and cross-border resolution of systemically important banks," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 5(4), pages 361-387, November.
    7. Paul Glasserman & H. Peyton Young, 2016. "Contagion in financial networks," LSE Research Online Documents on Economics 68681, London School of Economics and Political Science, LSE Library.
    8. Paul Glasserman & H. Peyton Young, 2016. "Contagion in Financial Networks," Journal of Economic Literature, American Economic Association, vol. 54(3), pages 779-831, September.
    9. Cetorelli, Nicola & Goldberg, Linda S., 2014. "Measures of global bank complexity," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 107-126.
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