The Corporate Complexity of Global Systemically Important Banks

Abstract

The financial crisis of 2007-2009 revealed that the corporate complexity of most of the Global Systemically Important Banks (G-SIBs) presented a formidable obstacle to any plausible orderly resolution of these institutions. This paper documents the extent of this complexity making use of an historical time series, developed by the authors, that shows the evolution of the number of majority-owned subsidiaries of G-SIBs over time. After a very significant increase in complexity before the crisis and until 2011, this trend may be reversing, possibly in response to regulatory and market pressures on banks since then. Nonetheless the reduction in complexity has been uneven across institutions and may not persist. The econometric analysis of this new set of panel data produces two key results with relevant policy implications: first, the relationship found in previous studies between the number of subsidiaries and bank size loses significance when time effects are introduced; second, large mergers and acquisitions are a key driver of complexity and their effect remains significant even when time effects are considered.

The funding of subsidiaries equity, double leverage and the risk of bank holding companies

“…However, we can link our article to earlier research on the complexity of financial firms. For example, according to Carmassi and Herring (), the complexity of Global Systemically Important Banks (G‐SIBs) is not attributable to their size but more directly depends on mergers and acquisitions in which G‐SIBs establish majority‐owned subsidiaries.…”

A Skeptical View of Financialized Corporate Governance

“…However, it has also allowed risk to become hidden and magnified in an opaque and complex system that is rife with conflicts of interest (Partnoy 2009;Zingales 2015). Whereas economists usually presume that the size of a sector is efficient if it is determined in markets, recent empirical work argues that "too much finance" may harm growth, create distortions, and contribute to income inequality (Cecchetti and Kharroubi 2015;Cournède and Denk 2015;de Haan and Sturm 2016).…”

“…Corporate structures are particularly complex and opaque in large banking institutions (Carmassi and Herring 2014).…”

Too big to fail: Measures, remedies, and consequences for efficiency and stability*

“…In order to solve problems of excessive size and complexity, we have to understand why banks have grown to the size and structural complexity they have. Carmassi and Herring () refer to a number of possible reasons, including economies of scale and scope, regulation, and tax rules. We will return to reasons in Section 6.…”

“…Both Carmassi and Herring (2014) and Laeven et al (2014) use the number of subsidiaries as a proxy for complexity. We distinguish between the number of domestic and foreign subsidiaries, and include the number of host countries.…”