New research from Professor Doyne Farmer of the Institute for New Economic Thinking at the Oxford Martin School 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. The 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.
- Download 'The Intrafirm Complexity of Systemically Important Financial Institutions'
- Read a brief on the paper published by the Center for Financial Stability
- The paper features in the New Scientist article 'Unravelling capitalism's hidden networks of power'