Banks’ complexity and risk: agency problems and diversification benefits

Diana Bonfim and Sónia Félix

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: Bank complexity is often associated with risk, due to moral hazard and agency problems. At the same time, complexity may be linked to diversification and scale economies, thus leading to less risk. In this paper, we provide empirical evidence on the relationship between bank complexity and risk-taking. We find a positive relationship between geographical complexity and bank risk. Banks that operate in more countries, both through banks and non-banks, have riskier balance sheets and more non-performing loans. Further, banks that operate in Africa have higher risk levels due to larger volatility of returns. The link between structural complexity and bank risk is weaker, but generally negative. Our results suggest that moral hazard and agency problems may be more acute when banks operate in many geographies and in emerging market economies. In contrast, the results are consistent with diversification and scale benefits arising from operating in more business areas.

JEL-codes: F23 G21 G23 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202010

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