By Isabel Argimón, María Rodríguez-Moreno
In recent decades, we have witnessed the expansion of complex institutions, which are organised in different legal entities and conduct different business in different locations. The diversification benefits that may arise because of the different sources of income and of the lack of synchronization have to be balanced against the agency frictions. We study the relationship between risk and complexity in banking groups in three dimensions: organizational, geographic and business and investigate the role of the effective control of parent banks over their affiliates. We document that greater complexity in the organizational and business domain gives rise to higher risk, while greater geographic complexity generates lower risk. We also find that when there is no effective control – 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.