When is a bank “systemically important”?
27 May 2015
New research from Doyne Farmer and collaborators shows that the organisational complexity of banks may impact financial stability.
To date, the designation of systemically important financial institutions (SIFIs) has resulted from an evaluation of the size of an institution combined with an assessment of its level of interconnectedness with other firms. Yet in addition to size and interconnectedness, the Financial Stability Board (FSB) definition of a SIFI includes a third attribute: institutional complexity.
Surprisingly, little has been done to quantify the complexity of large financial institutions. Lumsdaine and her co-authors use information on firms' control hierarchy to develop metrics to assess oversight challenges that a complex structure may pose, not just for a firm's senior management but also to supervisors.
For the subset of institutions they consider, findings include:
- Complexity and size are not synonymous. Size-based thresholds for SIFI determination are unsatisfactory.
- Generally speaking, firms have reduced their complexity between 2011 and 2013.
- There is little difference between SIFI and non-SIFI banks in their level of complexity, despite very different business models.
- In contrast, insurance companies are relatively more complex, despite being smaller in size, having fewer subsidiaries, and being less geographically or industry-diverse than the banks.
You can find a brief on the paper here
For a discussion in the New Scientist click here
And the academic paper can be found here
* Authors include: R.L. Lumsdaine (a), D.N. Rockmore (b,f), N. Foti (c), G. Leibon (b,d), J.D. Farmer (e,f)
(a)Kogod School of Business, American University, Center for
Financial Stability and National Bureau of Economic Research
(b)Department of Mathematics, Dartmouth College
(c)Department of Statistics, University of Washington
(d)Coherent Path, Inc.
(e)Institute for New Economic Thinking at the Oxford Martin School and Mathematical Institute, University
(f)The Santa Fe Institute