Finance: Research, Policy and Anecdotes

Complexity of banks poses governance and regulatory challenges – the more complex, the harder to govern and monitor and the harder to supervise and resolve in case of failure. And especially global banks are mind-bogglingly complex, as first documented by Nicola Cetorelli and Linda Goldberg.  But what are the implications of this complexity for performance and stability, both on the bank and the system level? And what drives complexity? The International Banking Research Network (IBRN), under the leadership of Claudia Buch and Linda Goldberg, used micro data and analytical advances to generate rich cross-country insights on the complexity and riskiness of banking organizations, with a selection of the consequent papers published in a recent special issue in the Journal of Banking and Finance and summarised in this article by Claudia and Linda. The special issue contains papers on banks in Colombia, Germany, Hong Kong, Italy, Norway and Spain, as well as a cross-country paper and a fascinating paper on the links between banks and shadow banking entities in Europe.  The papers cover many different aspects of complexity, including geographic, organisational and business complexity.

Claudia and Linda point to four key findings of the research project: “First, the largest banks in countries tend to be the more complex ones. Yet, even controlling for size, there is substantial diversity across banking organizations in terms of complexity choices. Second, over the past decade, banking organizations have tended to reduce complexity by limiting the number of affiliates in both domestic and foreign locations. Generally, however, complexity patterns are fairly persistent. Third, regulatory changes can alter both banking organization complexity and the associated risk profiles. Fourth, the link between complexity and risks involves trade-offs: diversification benefits and reductions in liquidity risk may weigh against agency problems, monitoring costs, and systemic risk contributions arising from higher complexity.”  Overall, a fascinating set of papers on a topic which will continue to pose challenges for academic and policymakers alike.

26. Jan, 2022