The Janus face of bank geographic complexity

Focus

This paper studies the relationship between bank geographic complexity and risk. We use a unique dataset of 96 bank holding companies around the world to measure the geographic dispersion of their affiliates. We study how this dispersion interacts with economic and regulatory conditions to affect the riskiness of the bank.

Contribution

Global banks' complexity is a major concern for policy makers, since it can make banks more opaque and harder to resolve. Yet, bank complexity is not a clearly defined concept, and its link with risk is not straightforward. We build a global database from which we derive a measure of bank geographic complexity across time and countries. This measure is distinct from and complements existing measures. It allows us to study the link between bank geographic complexity and risk in many economic and regulatory settings.

Findings

We find that geographic complexity has a Janus face, decreasing some aspects of bank risk but increasing others. Banks with a greater geographic spread are better insulated from domestic economic shocks. However, they are more exposed to global shocks. In addition, prudential regulation has a weaker impact on banks that are more geographically complex.

Abstract

We study the relationship between bank geographic complexity and risk using a unique dataset of 96 global bank holding companies (BHCs) over 2008-2016. From data on the affiliate network of internationally active banking entities, we construct a measure of geographic coverage and complexity for each BHC. We find that higher geographic complexity heightens banks' capacity to absorb local economic shocks, reducing their risk. However, higher geographic complexity is also associated with a higher vulnerability to global shocks and less impact of prudential regulation, increasing their risk. Geographic complexity helps more (with respect to local shocks) and hurts less (with respect to global shocks) if countries' business cycles are misaligned. Large, international regulatory reforms such as the implementation of the GSIB framework and the European Single Supervisory Mechanism reduce bank risk, but geographic complexity weakens this effect. Bank geographic complexity therefore has a Janus face, decreasing some but increasing other aspects of bank risk.

JEL classification: G21, G28

Keywords: bank geographic complexity, bank risk, bank regulation, GSIB.