Description

It is common to think about banks, even large ones, as monolithic institutions. This is true despite a widespread awareness that banks – especially global systemically important banks – are in fact sprawling corporate groups with, in some cases, hundreds or even thousands of subsidiaries that are tied together in a complex web of interdependencies. The treatment of complex corporate groups as monolithic can only be justified if, at least in functional terms, full consolidation takes place: in that case, the various entities that make up the corporate group seamlessly operate together as a single unitary actor. This article argues that such consolidation is often impossible and that, instead, banks are segmented along legal entity lines. Such ‘intrafirm segmentation’, which is shown to be the consequence of interacting corporate law and financial regulatory measures, is neither immaterial nor harmless, and generates unique risks to the operation of banking groups. To study these risks, the article proposes to blend legal and financial analysis to develop the ’segmentation adjacency matrix’, which can be used to study segmentation patterns and the risk they create within banking groups. The article concludes by outlining key policy implications of segmentation, in the areas of disclosure, capital and liquidity planning, and resolution.

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