Complexity and riskiness of banking organizations: Evidence from the International Banking Research Network

Abstract

Complexity of banks can have important ramifications for the performance and the risks of the banking system. Financial sector reforms that were implemented in the past decade have thus aimed to reduce and to better manage the risk implications of bank complexity. Yet, surprisingly little is known about changes in complexity across countries, its drivers, and its effects. The International Banking Research Network (IBRN) used data and analytical advances to generate rich cross-country insights on the complexity and riskiness of banking organizations. The initiative has four key findings. 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.