Heterogeneity in Bank Leverage: The Funding Channels of Complexity

This paper assesses the net impact of complexity on leverage, at the Bank Holding Companies (BHCs) level using unique French supervisory data from 2010 to 2017. Geographical and structural complexity introduce diversification benefits and agency problems that affect the risk of BHCs. Whether investors price this risk or not is decisive for the cost of equity and finally leverage. Our results show a negative impact of complexity on leverage. To explain this result, we then focus on the funding channels of complexity. We find that complexity goes hand in hand with additional capital surplus and increasing cost of equity. As a second major finding, our results show that the impact of complexity on leverage and the funding channels of complexity are heterogeneous across BHCs and depend on their systemic status. In fact, size, complexity and systemic status complement each other. Omitting one of these dimensions leads to misleading conclusions on bank stability.