Do bank complexities increase the risks? Insights from four Asian countries

Rayenda Brahmana, Muhammad Arsalan Hashmi, Dr Abdullah and Nuzhat Jabin Syed

Journal of Operational Risk

Abstract: The Basel III accord recommends diversification of the banking industry to better achieve financial stability. However, diversification creates bank complexity, which increases bank risk. This research examines the effect of bank complexity on bank risk within Asian banking systems, specifically those of China, Malaysia, Pakistan and Qatar. The study finds that the impact of bank complexity varies across countries and risk measurements. For instance, organizational complexity affects bank risk in China, Malaysia and Pakistan but not in Qatar. Meanwhile, business complexity reduces the risk of financial distress in Qatar and idiosyncratic risk in Malaysia. Geographical complexity increases financial risk in China but not in Malaysia and Qatar, while it increases market risk in Pakistan. The findings contribute to the literature by suggesting that bank complexity is not always beneficial or disadvantageous for banks in a risk context, and they cause us to reconsider some aspects of diversification studies. Moreover, the study provides policy implications, emphasizing the importance of regulatory oversight in managing bank complexity and mitigating regulatory arbitrage.

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