This thesis focuses on the study of the complexity of entities in the US banking sector. To this end, three lines of research are pursued in this thesis. We start with an investigation analysing the importance of strategic fit for post-M&A performance, which is one of the necessary prior steps for a financial institution to become complex. Second, we extend our investigation to analyse the effectiveness of the Dodd-Frank Act. 2010 to control the risk and non-traditional banking activities of complex bank holding companies. This law is considered one of the main avenues for the US government to control the continuously growing complexity of financial institutions. Lastly, we explore the influence of the complexity of banks on the composition of their board according to the degree of busyness of board members in terms of sitting on other boards. Using different econometric approaches and different samples, we present robust evidence for several findings. Firstly, strategic fit plays a key role as a performance enhancing factor for banks that decide to expand their market and/or diversify their products portfolio through pursuing merger deals. The subsequent analysis finds that the Dodd-Frank Act. 2010 has distinct effects on the risk and non-banking activities among the different types of complex BHCs. Moreover, we present differences between large and consolidated BHCs in their “shadow” banking activities following the enactment of this law. Furthermore, we observe that banks continue increasing their proportions of independent directors. However, banks require independent board members with fewer commitments from outside boards. Lastly, the busyness degree of the executive board members is related to the organisational complexity between banks and their subsidiaries. The empirical results give rise to numerous important policy implications. The supervision of a proper degree of strategic fit in key aspects between merging entities before a merger approval might increase the probability to achieve positive post-mergers outputs and reduce early bailouts that affect local economies. Furthermore, the recent re-regulatory changes have achieve to partially increase the stability of BHCs in which policy makers should consider the nature of complexity to have a better control of their risk, especially placing limits on their risky non-traditional banking activities. Finally, it has highlighted the importance of laws, related to the appointment of the board members, to take into account the individual complexity of each banking institution.

This dissertation contributes to the understanding of the relatively poor performance of banks and the depressed credit supply since the 2007-2009 crisis. In chapter 1, I study the role of securitisation in bank lending. I compare banks with and without access to securitisation and exploit the crash in the market for securitised products in 2007 as a shock to the ability to securitise. My results show that securitisation is associated with enhanced credit supply and lower dependence on capital in lending, giving rise to a capital relief channel. Furthermore, I find evidence that banks use unlocked capital from the securitisation of consumer and residential credit to propel commercial lending, suggesting spill-over effects. I document that since the market crash in late 2007 and even more so after the crisis when tighter regulations kicked in, the credit supply enhancing effects of securitisation have evaporated. In chapter 2, I study the impact of post-crisis stress testing on banking. CCAR is an extremely far-reaching and costly annual stress testing exercise whose outcome directly impacts banks' capital distributions. Bank executives name CCAR as one of the main culprits for poor performance and lower credit supply. I exploit cross-sectional variation in compliance to isolate the impact of CCAR. My results confirm that participating in CCAR is associated with significantly lower profitability and that banks shed high risk-weighted assets including large lending exposures to comply with elevated CCAR-capital requirements. In chapter 3, I study the stock market response to enhanced prudential standards (EPST). I find that immediate price adjustments reflect that investors perceived EPST as relatively good news. In the longer-term, I document that stocks of banks affected by EPST strongly outperform otherwise comparable bank stocks. This outperformance suggests a prolonged learning period of investors to evaluate the impact of EPST on banks' financial performances.

After the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the U.S. banking industry has significantly transformed its organisation structure from banks into bank holding companies (BHCs) as a result of the consolidation process, resulting in larger and more complex BHCs. Under the source-of-strength doctrine and the cross-guarantee authority, a BHC is required to inject capital into the bank subsidiary when it is financially distressed. However, these bank-failed resolutions were introduced before the deregulation; therefore, have not taken into account the increased organisational complexity of BHCs since then. Systemic importance of BHCs has recently attracted attention from policymakers and researchers. Accordingly, the complexity of BHCs will generate concerns about the risk implication of their subsidiaries as compared to the stand-alone structure. This thesis consists of three interrelated essays on stand-alone commercial banks, single-bank holding company (SBHC) affiliates and multi-bank holding company (MBHC) affiliates in the U.S. banking industry. It investigates the role that these financial intermediaries play in (i) banking business activities, (ii) insolvency risk, and (iii) mergers and acquisitions (M&As). The first essay is a qualitative analysis about on- and off-balance sheet analysis, asset securitization and derivatives of these banks which provide a thorough understanding of the difference in permissible scopes of banking business activities among stand-alone banks, SBHC affiliates and MBHC affiliates based on Bank’s Uniform Bank Performance Report. The findings show that SBHC affiliates and MBHC affiliates pursue diversification strategies by running a broad range of activities from traditional lending business to off-balance sheet, asset securitization and derivatives whereas stand-alone banks are more specialised. However, SBHC affiliates show more concentration on taking deposits, issuing loans and demonstrate the most important role in financial intermediation in the U.S. banking system as compared to MBHC affiliates and stand-alone banks. In a striking contrast, MBHC affiliates are dominant in off-balance sheet activities, asset securitization, and derivative activities. This suggests that the MBHC group performs the main role of disintermediation in the U.S. The second essay compares the differences in insolvency risk of stand-alone banks, SBHC affiliates and MBHC affiliates by using U.S. commercial bank data and BHC data from 1994 to 2012. The study’s results show that MBHCs in the U.S. have lower insolvency risk than SBHCs and stand-alone commercial banks at the parent levels, but have significant higher insolvency risk than both at the subsidiary levels. These results suggest that BHC affiliates benefit from an internal capital market and increased diversification from the BHC structure, but face risks of the increased complexity if the number of subsidiaries increases. The third essay investigates the difference in the likelihood of being targets and acquirers among stand-alone banks, SBHC affiliates and MBHC affiliates by using M&A data on U.S. commercial banks from 1997 to 2012. The reported results show that MBHC affiliates exhibit a greater likelihood of being targets than do stand-alone commercial banks, while stand-alone banks have a greater probability of becoming targets than do SBHC affiliates. The findings show that MBHC affiliates tend to have a greater likelihood of being acquirers than do SBHC affiliates. SBHC affiliates have a greater probability of being acquirers than do stand-alone banks. Those banks that acquire another bank within the same MBHC structure tend to be smaller and more financially constrained than those banks acquiring outside the same MBHC structure, whereas targets that are acquired by another bank within the same MBHC structure tend to be smaller, with higher profitability and capital than targets that are acquired by banks from outside the MBHC structure. The results suggest that the MBHC parent attempts to discipline distressed, poorly performing and smaller affiliates by involving them in M&As. To sum up, this study provides four policy implications. First, regulators should devote particular effort to regulating banks at the subsidiary levels to restrict their risk-taking behaviour. In this sense, the regulators should revise the source-of-strength doctrine cross-guarantee authority to ensure that MBHC affiliates can receive their parent’s bail-out in the future when in distress. Second, regarding complexity issues inside BHC structure, regulators should consider risk exposure between banks affiliated with SBHC and MBHC separately. Third, understanding the fact that MBHC parent attempts to hinder inherent risks of their subsidiaries by involving them in successive M&A inside the structure, the bank regulators should put more restrictions on their M&A applications and reveal their problems to the financial market. Finally, stand-alone banks should be encouraged to transform into SBHC affiliates in the future. Consequently, the Federal Reserve should make the path easier for banks to transform into SBHCs to increase their stability in the U.S. banking system.

This thesis is concerned with the relationships between profit, profit persistence, risk and competition within the US commercial bank sector. In particular, the thesis asks three questions: how profit and profit persistence are affected by changes in regulation designed to enhance competition; how profit persistence varies over time according to changes in market and economic conditions; how different aspects of banks' risk is affected by competition and market structure. Understanding the nature of these relationships is important given the prominent role banks play in the allocation of resources, the provision of capital to the economy and the stability of the financial system. Moreover, these roles in turn, have an effect on bank performance and wider economic growth and stability. Such issues have especially come to prominence following the financial crisis and thus there is a need for empirical evidence on which to base policy. To examine these relationships the thesis implements panel estimation techniques and obtains data on all commercial banks, primarily over the period 1984-2009, thus including births and deaths. The key findings show, first, that profit persistence is relatively low compared to previous US banking studies and compared to manufacturing firms. Moreover, persistence varies with regulatory changes, although not always in the expected direction, notably the increase in persistence following the 1999 Gramm-Leach-Bliley Act. Second, additional time-variation in persistence is linked to bank specific, market structure and economic factors. Notably, persistence varies with bank size and market share, market concentration and output growth, but the precise nature of these relationships varies across the sample and by bank size. Third, that there is a difference in the nature of the relationship between competition and loan risk on the one hand and competition and total risk and leverage on the other. We also find that the relationship between risk and market structure varies according to bank size and that the economic cycle influences banks' risk. The implications and contribution of this thesis lie in establishing empirical evidence for understanding the nature of the relationships between competition, profits and risk. This is particularly prescient given the move towards new regulation following the financial crisis. Key results here show that no simple relationship exists between bank size or market concentration and competition and risk, therefore policy should account for such differences, whether according to bank size or type of risk.