Evolution of Banks Complexity

Rise of complexity in Banks since 1980s has been remarkable.

Increase in

  • Assets
  • Connections
  • Number of Subsidiaries
  • Income Mix
  • Funding sources
  • Intermediation chains
  • Securitization (exotic structured financial products)
  • global reach

From  Bank Size and Systemic Risk

Large banks have grown significantly in size and become more involved in market-based activities (those outside traditional bank lending) since the late 1990s. The advance of information technology and deregulation, which has led to a proliferation of financial markets, may have been the key driver of this process.

Large banks tend to have lower capital, less-stable funding, more market-based activities, and be more organizationally complex than small banks. This suggests that large banks may have a distinct, possibly more fragile, business model.

Large banks are riskier, and create more systemic risk, when they have lower capital and less-stable funding. Large banks create more systemic risk (but are not individually riskier) when they engage more in market-based activities or are more organizationally complex.

Failures of large banks tend to be more disruptive to the financial system than failures of small banks. The failures of large banks generate liquidity stress in the banking system, their activities that rely on economies of scale and scope cannot easily be replaced by small banks, and the marginal cost of taxpayer support may increase in the volume required.

Traditional bank regulation, which focuses on individual bank risk, may be insufficient for large banks. Additional regulation, based on systemic risk considerations, is needed to deal with the externalities of distress of large banks. This may include capital surcharges on large banks and measures to reduce their involvement in market-based activities and their organizational complexity.

Banks may operate at a size that is too large from a social welfare perspective due to “too- big-to-fail” subsidies and corporate governance shortcomings. However, the potential for economies of scale in large banks cannot be dismissed. As a result, “optimal” bank size is uncertain.


Key Sources of Research:

5-Bank Asset Concentration for United States



Return on Average Assets for all U.S. Banks



Return on Average Equity for all U.S. Banks



Evolution in Bank Complexity

Nicola Cetorelli, James McAndrews, and James Traina


Click to access 1412cet2.pdf


Measures of Global Bank Complexity

Nicola Cetorelli and Linda S. Goldberg

Click to access 1412ceto.pdf


Organizational Complexity and Balance Sheet Management in Global Banks

Nicola Cetorelli, Linda S. Goldberg

Issued in April 2016



Same Name, New Businesses: Evolution in the Bank Holding Company

Nicola Cetorelli and Samuel Stern



Cross-Border Banking Flows and Organizational Complexity in Financial Conglomerates

Linda S. Goldberg

January 27 2016




A Structural View of U.S. Bank Holding Companies

Dafna Avraham, Patricia Selvaggi, and James Vickery

Click to access 1207avra.pdf


Consolidation in the U.S. Banking Industry: Is the “Long, Strange Trip” About to End?


Kenneth D. Jones and Tim Critchfield


Click to access article2.pdf



Jacopo Carmassi & Richard J. Herring



Click to access 15-10.pdf


U.S. Banks’ Changing Footprint at Home and Abroad

Linda Goldberg and Rose Wang




Federal Reserve Bank of New York Economic Policy Review

December 2014 Volume 20 Number 2

Special Issue: Large and Complex Banks


Click to access EPRvol20no2.pdf


In-Depth: The Big Banks: Too Complex To Manage?




Too Big To Fail:The Pros and Cons of Breaking Up Big Banks

David C. Wheelock



Click to access Too_Big_To_Fail.pdf


Systemically Important or “Too Big to Fail” Financial Institutions


Marc Labonte

June 30, 2015


Click to access R42150.pdf


Bank Size and Systemic Risk

Luc Laeven, Lev Ratnovski, and Hui Tong



The Evolution of Banks and Financial Intermediation: Framing the Analysis


Nicola Cetorelli, Benjamin H. Mandel, and Lindsay Mollineaux


Click to access 1207cet1.pdf



Evolution and Heterogeneity among Larger Bank Holding Companies: 1994 to 2010


Adam Copeland


Click to access 1207cope.pdf


The Role of Banks in Asset Securitization

Nicola Cetorelli and Stavros Peristiani


Click to access 1207peri.pdf


Federal Reserve Bank of New York Economic Policy Review

July 2012
Volume 18 Number 2

Special Issue: The Evolution of Banks and Financial Intermediation


Click to access EPRvol18n2.pdf

Author: Mayank Chaturvedi

You can contact me using this email mchatur at the rate of AOL.COM. My professional profile is on Linkedin.com.

3 thoughts on “Evolution of Banks Complexity”

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