How Organizational and Geographic Complexity Influence Performance? Evidence from European Banks.

Summary We empirically investigate how complexity stemming from the type of foreign affiliates and the geographic dispersion of such affiliates affects the parent bank's individual risk and profitability. Our analysis is based on detailed hand-collected data on the worldwide locations of subsidiaries and branches of EU banks. Our results show that being present abroad is beneficial for bank stability as it contributes to lower default risk. Banks that are present abroad through both subsidiaries and branches appear to be more stable than banks that are present under one form only. Being present with branches only is the most effective way to reduce risk-taking. Nevertheless, higher geographic dispersion of affiliates around different world regions is associated with higher volatility of earnings and higher profitability. JEL classification: G21, G28.