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1、AbstractComplexity 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
2、 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 yielded four key
3、 findings. First, the largest banks in countries tend to be the more complex ones. 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 t
4、he number of affiliates in 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: dive
5、rsification benefits and reductions in liquidity risk may weigh against agency problems, monitoring costs, and systemic risk contributions arising from higher complexity.Key words: bank complexity, financial regulation, international banking, risks in bankingGoldberg (corresponding author): Federal
6、Reserve Bank of New York (email: linda.goldberg). Buch: Deutsche Bundesbank. The authors thank the International Banking Research Network and in particular Iaki Aldasoro, Isabel Argmon, Diana Bonfim, Sonia Felix, Krysztoph Gajewksi, Bryan Hardy, Andres Murcia Pabon, Francesco Palazzo, Maria Rodrguez
7、-Moreno, Alejandra Rosado Cuervo, Esther Segalla, and Ursula Vogel for thoughtful discussions of content, methodology, and data, as well as for the empirical results and research that serve as inputs into the meta- analysis of this paper. Excellent research support was provided by Benedikt Fritz, Sa
8、rah Hamerling, Janavi Janakiraman, and Kevin Lai.This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the author(s) and do not necessarily reflec
9、t the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).To view the authors disclosure statements, visit http HYPERLINK /research/staff_reports/sr966.html s:/www.newyo HYPERLINK /research/staff_reports/sr96
10、6.html /research/staff_reports/sr966.html.MotivationBanking organizations are quite heterogeneous: they can be simple comprised of traditional banks that mainly provide basic banking functions of taking deposits and extending loans or can be complex in their organizational structures, types of busin
11、esses conducted, and their geographic span. Many banking organizations are corporate conglomerates that contain banks, but also can contain dozens, hundreds, or even thousands of nonbank legal entities. Their business scope can span financial and non-financial activities, and their geography can spa
12、n multiple countries.Despite the clear relevance, the complexity patterns and their implications for the activities and the risks of banking organizations are under-researched. Understanding these patterns and the implications for banking organization risks are the focus of this paper. While complex
13、ity often has a negative connotation, we find that it entails tradeoffs. Complexity can reduce exposure to some risks as it allows banks to exploit synergies across activities. It can yield benefits in terms of risk diversification and reduced liquidity risk. However, complexity can also increase ri
14、sks due to the stronger challenges that occur around risk containment and management, and it can increase the costs and feasibility of resolution when the organization fails.The global financial crisis of 2007/08 demonstrated the dark side of bank complexity. The balance sheet frailties of large and
15、 complex financial institutions had been underestimated, as were the negative externalities that were imposed on other institutions, governments, and the real economy. Particularly relevant are costs that arise in times of stress, with recovery and resolution of gone concern banking organizations im
16、peded by a high degree of complexity, including in cross-border contexts.Far-reaching post crisis reforms have thus aimed at making financial institutions more resilient and at reducing their systemic risk externalities. The regulatory community agreed to a common approach to measure complexity usin
17、g then available data (BIS 2013). This measure uses specific balance sheet categories associated with informational opacity and illiquidity in assessing the need for additional liquidity and capital requirements, as well as proxies for complexity. HYPERLINK l _bookmark0 2 However, the crisis and sub
18、sequent policy responses revealed the need for a better understanding of the complexity of banking organizations, both in terms of determinants and implications for risk.2The Basel Committee on Banking Supervision adopted an assessment methodology for global systemically important banks, and higher
19、loss absorbency requirements, with the updated methodology is at BIS (2013).Today, we are in a much better position to assess the determinants and patterns of bank complexity than prior to the global financial crisis. This includes assessing relationships with organizational incentives and risk outc
20、omes, and the effects of the regulatory reforms that have been implemented post crisis. One simple reason is the passage of time. More than ten additional years of data enable meaningful analytics, comparing developments over time and around significant policy actions that occurred during this perio
21、d. In addition, the data infrastructure has improved significantly: more granular bank-level data allows creation of complexity measures and studying trends across different banking organizations. Another factor is that the research community has developed tools to analyze the efficiencies and incen
22、tive issues within banking organizations, including on how moral hazard, organizational design, and corporate cultures influence risk outcomes.The HYPERLINK /IBRN/index.html International Banking Research Network (IBRN) advanced this agenda by generating rich cross-country insights on the complexity
23、 and riskiness of banking organizations. Researchers from thirteen central banks and the Bank for International Settlements (BIS) worked with confidential data collected by their regulators to provide comprehensive new evidence on banking organization complexity. Research papers written span perspec
24、tives of home and host countries of complex banking organizations. Studies consider the mechanisms through which the complexity of banking organizations affects risks associated with these institutions, as well as drivers of such complexity.This comprehensive new evidence on banking complexity from
25、the vantage point of organizational, business, and geographic dimensions yields four key contributions:First, structural features of bank complexity are quite persistent over time. High complexity tends to be concentrated in a relatively limited number of institutions, with the largest asset size ti
26、er of banking organizations also having the greatest degree of complexity. The relationship between (asset) size and complexity strongest amongst larger banking organizations. However, even controlling for size, there is considerable diversity across organizations in their complexity choices so that
27、 size is not a sufficient proxy for banking organization complexity.Second, over time, banks have tended to reduce organizational complexity by limiting the number of affiliates located in domestic and foreign locations. Aggregate indicators of business complexity exhibited more modest changes over
28、time, with specific changes arising in the composition of businesses rather than complexity across businesses. Geographic complexity increased for banking organizations from some countries while declining for others.Third, regulatory changes can alter both complexity and the risk profiles of complex
29、 banking organizations. Several studies measure the response of complexity and risk to the Basel IIIregulatory framework, including its criteria for the designation of G-SIBs. German banks affected by a tightening of regulations reduced geographic and business complexity, but at the same time manage
30、d to increase their diversification and thereby reduce theirrisk (Martynova and Vogel 2021). Foreign banking affiliates of G-SIBs hosted by Hong Kong saw a larger decline in risks than their counterparts as a result of the reduced business complexity of G-SIBs (Ho, Wong and Tan 2021). Implementation
31、 of Basel III regulations has been associated with a change in equity portfolios and divested financial holdings in Austrian banking organizations (Ehrlich , Elsinger, Lindner, Segalla and Sigmund 2020). Meanwhile, Norwegian bank balance sheet opacity declined in response to Basel III (Cao and Juels
32、rud 2021). US regulatory changes specifically targeted at organizational complexity, such as the Living Will provisions of the Dodd Frank Act, significantly changed complexity and risk outcomes. Organizational complexity declines were associated with reduced systemic risk, but increased liquidity ri
33、sk exposures (Correa and Goldberg 2021). In Spain, the introduction of Institutional Protection Schemes (IPS) as a consolidation mechanism allowed increases in organizational complexity without affecting idiosyncratic risk (Argimn and Rodrguez-Moreno 2021).Fourth, specific tests of the mechanisms th
34、rough which complexity influences risk outcomes reinforce the focus on trade-offs: Diversification benefits tend to reduce idiosyncratic risk, while agency problems and monitoring costs in complex institutions might increase risk. For US banks, trade-offs differ by type of complexity considered: hig
35、her organizational, business, and geographic complexity generated diversification benefits. Geographic complexity also reduces liquidity risk exposure. All three types of complexity contribute to increased systemic risk.Idiosyncratic risk also declines with complexity, in particular geographic compl
36、exity, for Spanish banks and also for business complexity, for Polish and Portuguese banking organizations. Such diversification benefits appear to be outweighed by higher agency costs of complex organizations: Results for banking organizations in Colombia, France, and Hong Kong show that idiosyncra
37、tic risks tend to increase with complexity. German systemically important banks managed to increase their diversification benefits while also reducing complexity in response to regulatory tightenings. Italian banking organizations active in more markets were found to be more selective, with reduced
38、exposure to riskier borrowers; the opposite holds for intermediaries with a higher degree of diversification of fee income. This is consistent with mixed idiosyncratic risk outcomes. Various studies point to better risk frontier outcomes when banking organizations are ex ante better capitalized or b
39、etter governed. In a cross-country setting, the geographic complexity of foreign banking affiliates of the largest international banks tended to mitigate the effects of local shocks on bank risk (z-score) while weakening the positive effects of prudential regulation on capitalization (Aldasoro, Hard
40、y and Jager 2021).The remainder of the paper is organized as follows. In Part two, we compile new evidence on the patterns and determinants of bank complexity. Part three focuses on the drivers of bank complexity. Part four presents evidence on the link between complexity and risk. Part five conclud
41、es with policy insights and research suggestions.Evidence on Bank ComplexityWhile the simple, stand-alone commercial bank has traditionally been the perspective embedded in research and policy, the banking landscape has changed. Many banks are complex combinations of different businesses, sometimes
42、in many locations around the world, and conducted through a host of legal entities. Countries can also serve as hosts to foreign banking organizations, with subsidiaries or branches of complex global bank holding companies (BHCs) being important providers of local credit and financial services. Belo
43、w, we describe recent analytical advances that provide lenses on these forms of complexity, and then we turn to new cross-country evidence.Measuring Bank ComplexityRegulators use a number of criteria to designate global systemically important financial institutions (G-SIFIs) and to assess systemical
44、ly important banks on the national level. These criteria include size, cross-jurisdictional activity, inter-connectedness, and complexity.Complexity, in the regulatory context, is related to the opacity of balance sheet and off balance sheet assets of banks. It increases with holdings of assets that
45、 are hard to understand and to price, such as notional amounts of over-the-counter (OTC) derivatives, trading and available-for- sale (AFS) securities, and level 3 assets from the classification method of the Basel Committee for Banking Supervision (BCBS) for global systemically important banks (G-S
46、IBs) (BCBS 2013).Other relevant dimensions of complexity include the extent to which there is broad business scope, wide geographic scope, and more organizational complexity through multiple legal entities. These concepts can be partially informed using information on banks balance sheets. Some are
47、also informed by using data on the industries and locations of the bank, non-bank financial, and non-financial affiliates of the banking organizations. Recent research links such complexity measures to economic or financial outcomes. Cetorelli and Goldberg (2014), for example, distinguish between or
48、ganizational complexity, business complexity, and geographic complexity as for 170 foreign banking organizations with US branches, with measures constructed using a cross-country database covering full organizations (Bankscope). Similarmetrics and data sources are used by Carmassi and Herring (2016)
49、 for the very largest global banks. HYPERLINK l _bookmark1 3Yet, publicly available databases reach limits when trying to describe relevant features of bank complexity. Hence, papers in this initiative of the International Banking Research Network (IBRN) draw on complementary supervisory data or oth
50、er sources of micro-level data available in central banks to document changing patterns in the complexity of banks. The main concepts of complexity that initiative participants created using regulatory data include: HYPERLINK l _bookmark2 4Organizational complexity, which measures the number of enti
51、ties within the full banking organization.Business complexity, which captures the span and concentration of affiliates across types of broad business categories (bank, insurance, other financial, real estate, other nonfinancial) or specific types of industries defined usin HYPERLINK /eos/www/naics/
52、g NAICS codes assigned to legal entities in banking organizations (US) or NACE codes for European countries.Geographical complexity, reflecting the span and concentration of numbers of affiliates across country locations.These complexity concepts are also relevant for countries that are hosts to com
53、plex foreign banking organizations. However, gathering comparable metrics from the regulatory data available to host countries authorities is more challenging, as authorities often do not have full information on the span of all affiliates of the foreign-owned banking organization. Likewise, the com
54、pilation of information on the span of foreign branch locations (often not counted as separate legal entities) in addition to banking subsidiaries is challenging. Claessens and van Horen (2014) provide cross-country evidence on these networks, documenting an expansion of complex global banks from 77
55、4 in 1995 up to 1,334 by 2009. Most banks come from OECD countries, but also substantially from other high income, emerging market, and developing countries.New Evidence from the IBRNThe International Banking Research Network has compiled new evidence on the complexity of global banks, complementing
56、 previous work on changes in the structure of banking systems (CGFS 2018). Table 1 summarizes information on participating countries, the number of3For conceptual foundations, see HYPERLINK /medialibrary/media/research/epr/12v18n2/1207avra.pdf Avraham, Selvaggi, and Vickery (2012), Cetorelli and Gol
57、dberg (2014), and HYPERLINK /abstract%3D3342464 Goldberg and Meehl (2020).4See Online Appendix Table 1.institutions, the share of banking system assets, and types of institutions covered by these complexity metrics. Fourteen countries provide metrics on domestic banking organizations versus foreign-
58、owned but domestically regulated banks, with combined assets of included banking organizations representing most of banking system assets. Some countries exclude smaller, highly specialized, or cooperative banks with a low degree of complexity. Looking across countries, the data includes information
59、 on 19 of the 30 global systemically important banks (G-SIBs) designated as of November 2019 by the Financial Stability Board.Complementary work by the BIS adds cross-country evidence on the network and concentration of international branches and subsidiaries of 96 large banks from around the world
60、for 2008 to 2016, including 29 of the 30 GSIBs (Aldasoro, Hardy, and Jager 2021). Over time, global banking organizations as they have become more distinct in their international footprints.insert Table 1 hereBanking organization complexity differs significantly across countries (Table 2). Organizat
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