Banks' complexity-risk nexus and the role of regulation

Natalya Martynova and Ursula Vogel

No 14/2021, Discussion Papers from Deutsche Bundesbank

Abstract: We investigate the relationship between bank complexity and bank risk-taking using German banking data over the period 2005-2017. We find that more complex banking organizations tend to take on more risk, but that this complexity-risk nexus decreases over time. We study how regulatory tightenings inherent in this period, and addressing systemically important banks (SIBs) in general and complexity more specifically, alter banks' choices of complexity and risk. Banks reduce their complexity in response to regulatory tightenings, as these increase the related regulatory costs. Surprisingly, for SIBs in particular, the reduction of regulatory costs is associated with an increase in diversification benefits. As a result, they are able to lower their idiosyncratic risk more than other banks. The overall complexity-risk nexus is lower after regulatory tightenings. Thus, our results indicate that post-crisis regulation is effective in reducing banks' complexity-risk nexus.

Keywords: bank complexity; bank risk-taking; bank regulation; too-big-to-fail (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban and nep-cba
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Journal Article: Banks’ complexity-risk nexus and the role of regulation (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:142021

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