Risk and control in complex banking groups

Using Spanish confidential supervisory data, this paper examines the effect of the corporate structure of banking group's affiliates (organizational complexity), of their business lines (business complexity) and their locations (geographic complexity) on bank's risk. We document that greater complexity in the organizational and business domain gives rise to higher risk, while greater geographic complexity generates lower risk. Next, we find that effective control is a determinant of the relationship between risk and complexity. We study this effect in two ways: i) comparing the impact of complexity under varying intensity of legal control; and ii) analysing mergers that confer different degrees of control over group's affiliates. We find that when there is no effective control, such as in multi-group affiliates, complexity – no matter type – gives rise to higher risk. Additionally, when there is no transfer of control in a merger, the resulting increased complexity does not generate a change in risk.