Bank Complexity, Governance, and Risk

No 27547, NBER Working Papers from National Bureau of Economic Research, Inc

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 costs of bank resolution when organizations fail, the effect of complexity on BHCs' broader risk profile 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.

JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban and nep-cfn
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Ricardo Correa & Linda S. Goldberg, 2021. "Bank complexity, governance, and risk," Journal of Banking & Finance, .

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Journal Article: Bank complexity, governance, and risk (2022)
Working Paper: Bank Complexity, Governance, and Risk (2020)
Working Paper: Bank Complexity, Governance, and Risk (2020)
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