In yesterday’s post, our colleagues discussed the historic changes in financial sector size. Here, we tackle a related question on dynamics—how has bank complexity evolved through time? Recently, academics and policymakers have proposed a variety of strong actions to curb bank complexity, stemming from the view that complex banks are undesirable. While the large banks of today are certainly complex, we lack a thorough understanding of how they got that way.
In this post and in our related contribution to the Economic Policy Review (EPR) volume, we focus on organizational complexity, measured by the number and types of entities organized together under common ownership and control. Using a new data set of financial-sector acquisitions, we study the structural evolution of banks and its implications for policy. We argue that banks grew into increasingly complex conglomerates in adaptation to a changing financial sector.
Complexity and Financial Acquisitions
In a 2012 series of blog posts, we debated the role of banks in an evolving financial intermediation industry. Fueled by the advent of asset securitization, intermediation was moving “to the shadow,†with nonbank entities increasingly able to fulfill the functions traditionally provided by banks. We argued—and showed some evidence—that one way for banks to adapt was by reorganizing, developing into larger bank holding companies (BHCs) incorporating the nonbank entities that were becoming so important to the process of intermediation. Here, we build on those original thoughts, presenting a deeper analysis of banks’ evolution into complex conglomerates.
How did this transformation take place? To address this question, we use a comprehensive data set of U.S. financial-sector acquisitions from SNL Financial, focusing on trends in bank structure (and, therefore, bank complexity) by looking at the industry types of buyers and targets. Our deals span 23,451 unique entities across ten different industries from 1989 to 2012. Note that since these are industries, “bank†refers to both commercial banks and bank holding companies.
