G-SIBs Need To Simplify Their Structure, Little Progress Made

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Research from the Systemic Risk Council finds that there hasn’t been much progress getting complex, global banks to simplify their corporate structure

For all the regulatory change we’ve seen in the last eight years, global systemically important banks (G-SIBs) are no less complex today than they were before the crisis, according to research released today by the Systemic Risk Council studying the 29 institutions designated as G-SIBs by the Financial Stability Board in 2013.

“The complex structure and opaque connections among G-SIBs impeded oversight and market discipline before the crisis and greatly complicated management and resolution after the crisis”, says Richard Herring, who co-authored the paper Corporate Structures, Transparency and Resolvability of Global Systemically Important Banks with Jacopo Carmassi. “Greater progress is needed to simplify and rationalize G-SIBs’ organizational structures and improve transparency and market understanding of those structures.”

G-SIBs have 2.6x more subsidiaries than non-financials of the same size

The study found that in 2013 the G-SIBs had an average of $1.587 trillion in assets (the largest had $3.100 trillion), 1,002 majority-owned subsidiaries (a high of 2,460), an average of 2.6 times more subsidiaries than comparably sized non-financials, and an average of at least one subsidiary in 44 separate countries, with a high of 95.

But the researchers didn’t just confirm that the G-SIBs are massive, or that they have lots of subsidiaries, both of which we knew. The G-SIBs complex structure would make it incredibly difficult to wind one of them down in an orderly fashion, and the decision not to reveal the banks’ living wills (or at least the broad strokes of them) means that the public can’t judge if the plans are realistic or not.

Four ways to improve transparency, discourage complexity

Herring and Carmassi have four recommendations that they argue would go a long way to improving the situation, three of which are really just about getting more information out there to inform the debate about banking regulation. First, consistent terminology would improve the debate simply by getting everyone on the same page. They give the example of Citigroup, which had 1,883 subsidiaries in 2013 according to the Federal Reserve but just 184 according to Citi’s SEC filings. Neither is really incorrect, but the term is being used very differently in those two cases. They also want G-SIBs organizational structure to be publicly available in a searchable format, and for key features of their living wills to be made public.

Finally, Herring and Carmassi recommend re-thinking financial regulations in light of how they affect organizational complexity, instead of thinking only in terms of limiting risk as has often been the case.

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