Abstract - The Corporate Complexity of International Financial Conglomerates and Its Implication for Systemic Risk
Conglomeration, consolidation and globalization have produced a number of international financial conglomerates that are crucial to the functioning of global capital markets. Among the 16 international financial conglomerates identified by regulators as large, complex financial institutions (LCFIs), each has several hundred majority-owned subsidiaries and 8 have more than 1,000 subsidiaries. We review a number of reasons why any large, international corporation might want to adopt a substantial degree of corporate complexity: to ease asymmetric information problems among shareholders, creditors and managers; to mitigate conflicts of interest; to insulate the rest of the group from risks in special activities (and vice versa); to minimize taxes; or simply as a legacy of mergers and acquisitions. But LCFIs have the additional burden of regulation that adds to their corporate complexity. On average the 16 LCFIs have nearly 2.5 times as many majority-owned subsidiaries as the 16 largest non-financial firms. We explore some of the legal and regulatory challenges that would be encountered in unwinding an LCFI and argue that the complexity of their corporate structure is a source of systemic risk. They may have become too complex to fail.
Richard J. Herring
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