Jacopo	Carmassi	

LUISS	Guido	Carli	University	

jcarmassi@luiss.it	

Corporate Complexity & the Orderly 

Resolution of G-SIBs

Selected	Highlights	of	the

Carmassi/Herring	Study	

1	

FDIC	Systemic	Resolu2on	

Advisory	Commi8ee

December	10,	2014	

Richard	J.	Herring	

herring@wharton.upenn.edu

The	Wharton	School,	University	of	Pennsylvania	
The core problem 

✓ Crisis	revealed	complex	and	opaque	interconnecOons	

among	G-SIBs	

— Impeded	effecOve	oversight	by	authoriOes	ex	ante

— Complicated	crisis	management	&	resoluOon	ex	post

✓ Global	in	life,	but	fragmented	into	a	huge	number	of	

separate	legal	enOOes	in	death	

— Insuperable	difficulOes	in	coordinaOng	legal	proceedings	in	

mulOple	jurisdicOons	

— InformaOon	so	fragmented	that	impossible	to	preserve	any	going	

concern	value	group	may	have	had	

✓ Current	disclosures	for	creditors	to	evaluate:	

— Corporate	structure		

— Priority	of	claims	in	a	resoluOon		

— ResoluOon	strategy	

2	
Dimensions of complexity 

1. Interconnectedness	with	other	G-SIBs	and	systemic	

clearing	&	seVlement	systems	

2. Share	of	systemically	important	acOviOes	&	

availability	of	subsOtutes	

3. Complexity	of	acOviOes	–	opacity	

4. Extent	of	cross-jurisdic3onal	ac3vity	

5. Size		

6. Organiza3onal	complexity	

Perhaps	not	the	most	important,	but	in	principle,	easiest	to	

measure	objec9vely	and	fundamental	to	deeper	analysis	

3	
Growth in organizational & geographic complexity 

1990 vs. 2012 

Number	of	Subsidiaries	 Number	of	countries	

4	

Source:	Avraham	et	al.	(2012)	on	NaOonal	InformaOon	Center	data	and	FR	Y-10.	Data	as	of	

February	20,	2012	and	December	31,	1990.	
On Average, More Complex than before the Crisis

Evolution of Size & Complexity 2007 (pre-crisis) vs. 2012 (post-crisis) 

5	

Source:	ComputaOons	based	on	Bankscope	data.	Note	assets	are	not	adjusted	for	significant	

remaining	differences	between	GAAP	and	IFRS	accounOng	standards	regarding,	among	other	

things,	necng	of	derivaOves	and	treatment	of	investments	held	for	sale	and	held	to	maturity.	
But Some Evidence of Simplification in 

Most Recent Data

Evolution of Average Number of Subs* and Total Assets for G-SIBs 

6	

*Majority-owned	subsidiaries	for	which	G-SIBs	are	the	ulOmate	owners	with	a	minimum	control	

path	of	50.01%	at	all	steps	of	the	control	chain.	Source:	ComputaOons	from	Bankscope	data.	
Focus: G-SIBs

Overview Bankscope data 

✓ Cross-border	complexity	

7	

Assets	 %	foreign	

assets	

Total	

subsidiaries		

Number	

of	

countries	

%	foreign	

subsidiaries	

%	subs	in	

off-shore	

centers	

Average	 $1.587	

trillion	

42%	 1,002	 44	 60%	 12%	

High	 $3.100	

trillion	

87%	 2,460	 95	 95%	 28%	

Assets	and	total	subsidiaries	as	of	yearend	2013;		number	of	countries,	%	of	foreign	subsidiaries	

and	%	of	subsidiaries	in	offshore	financial	centers	as	of	May	2013;	%	of	foreign	assets	as	of	

yearend	2012.	Source:	ComputaOons	from	Bankscope	data	and	banks’	annual	reports.	
Activity by industry classification 

(13 G-SIBs, May 2013) 

Banks	 4%	

Insurance	Companies	 1%	

Mutual	&	pension	funds,	nominees,	trusts	&	trustees	 22%	

Other	financial	subsidiaries	 25%	

Non-financial	subsidiaries	 47%	

8	

✓ LiVle	addiOonal	detail	available	

✓ Some	may	be	trivial	and	not	an	obstacle	to	an	orderly	resoluOon	

• Example:	An	SPV	that	is	liquidated	when	a	trigger	is	crossed	

✓ But	an	external	observer	can’t	tell	
Footnote to Preceding Table 

Bankscope Industry Classifications 

1.‘Other	financial	subsidiaries’	include	hedge	funds,	

private	equity	and	venture	capital	subsidiaries.	

2.‘Non-financial	subsidiaries’	include	all	companies	that	

are	neither	banks	nor	insurance	companies	nor	

financial	companies.	They	can	be	involved	in	

manufacturing	ac2vi2es	but	also	in	trading	ac2vi2es	

(wholesaler,	retailers,	commodity	brokers,	etc.)		We	

have	allocated	founda2ons	and	research	ins2tutes	to	

this	category	as	well.	

9	
Regulation Often Increases

Corporate Complexity 

✓ G-SIBs	have	2.5	x	more	subsidiaries	than	non-financial	

insOtuOons	with	comparable	market	caps	

✓ Safety	and	soundness	and	other	regulatory	requirements	tend	

to	increase	the	number	of	host	and	home	country	subsidiaries:	

— To	facilitate	host	and	home	country	supervision	and	regulaOon	

• To	impose	jurisdicOonal	restricOons	

• To	impose	acOvity	restricOons	

✓ Regulators	have	the	opportunity	to	foster	transparency	and	

simplicity	

— Improved	disclosures	in	public	secOon	of	living	wills	

— Reconsider	regulaOons	with	an	emphasis	on	facilitaOng	transparency,	

simplicity	and	orderly	resoluOon	

10	
Tax Incentives Often Increase 

Corporate Complexity 

Open	G-SIBs	can	minimize	their	tax	expense	by	conducOng	a	

transacOon	or	structuring	a	line	of	business	through	mulOple	

separate	enOOes	

— This	requires	the	expenditure	of	substanOal	resources	in	tax	

planning	and	increases	the	complexity	and	opacity	of	a	

transacOon	or	line	of	business	

— An	average	of	12%	of	G-SIB	subsidiaries	are	located	in	tax	havens	

• High	of	28%	

• Low	of	3%	

— Off-shore	transacOons	are	but	a	fracOon	of	the	ways	in	which	tax	

consideraOons	distort	the	organizaOon	of	business	

11	
Tax Minimization Strategies Often Increase 

Corporate Complexity 

✓ 3	common	techniques	to	reduce	in-country	and	US	taxes	on	internaOonal	

operaOons	that	increase	corporate	complexity:	

1. Create	enOOes	in	low	tax	jurisdicOons	to	house	service	operaOons	and	intangible	

property		

• Charge	enOOes	in	high	tax	countries	for	use	of	intangible	property,	

financing, and	services	thereby	shiping	profits	to	tax	haven	

2. Create	“buffer”	intermediate	holding	company	enOOes	between	profitable	

subsidiaries	and	US	parent	to	avoid	foreign	subsidiary	earnings	and	profits	from	

being	considered	repatriated	to	the	US	and	thus	immediately	taxed	in	the	US	

3. Create	enOOes	in	jurisdicOons	with	favorable	income	tax	treaOes	and	low	tax	

withholding	rates		

• Route	movement	of	money	for	payments	and	dividends	between	group	

members	through	these	enOOes	

✓ Despite	the	obstacle	to	an	orderly	resoluOon	that	the	resulOng	complexity	

presents,	no	indicaOon	that	considered	in	design	of	tax	policy

§ Yet	potenOal	fiscal	costs	of	dealing	with	consequences	of	complexity	can	be	very	

substanOal	

12	
1.	Across	insOtuOons	

2.	For	the	same	insOtuOon	over	Ome	

Lack	of	transparency	undermines	credibility	of	

resoluOon	planning	

Current disclosure practices hinder public 

monitoring of progress in simplification 

13	
Disclosures in Living Wills

Inadequate 

✓ DefiniOons	and	terminology	are	not	applied	by	banks	

consistently,	even	for	material	enOOes	

— Banks	do	not	publicly	disclose	the	raOonale	used	for	

idenOfying	core	business	lines	or	material	enOOes	

— Intermediate	holding	companies	are	not	consistently	

reflected	in	disclosure

✓ Opaque	and	inconsistent	disclosures	prevent	meaningful	

comparisons	of	the	public	secOon	of	living	wills	across	

banks	

— And	because	these	informal	disclosure	standards	change,	

difficult	to	track	changes	for	a	single	bank	over	Ome	

14	
Selected Public Information Provided By the 11 

First Wave Institutions (2012) 

Number	of	Core	

Business	Lines	

Number	of	en33es	

with	individual	b/s	

or	income	data	

Number	of	material	

payment,	clearing	&	

seOlement	systems	

Number	of	

material	

supervisory	

authori3es	

High	 30	 2	 19	 45	

Low	 2	 0	 10	 8	

15	

Were	consistent	standards	applied	by	the	G-SIBs?	

• One	insOtuOon	that	reported	parOcipaOon	in	16	material	

payment,	clearing	and	seVlement	systems	reports	

parOcipaOon	in	550	in	another	source	
Recommendations 

✓ DefiniOon	of	material	enOty	should	be	standardized	based	on	

consolidaOng	statements	

-	If	more	than	x%	of	consolidated	assets;	or	

-	If	generate	more	than	x%	of	consolidated		revenues		

-	Should	include	not	only	operaOng	enOOes	above	threshold,	but	also	

holding	companies	that	issue	public	debt	

✓ OrganizaOon	chart	showing	hierarchy	of	material	enOOes	

✓ InformaOon	regarding	material	enOOes	should	include	informaOon	

relevant	to	creditors,	counterparOes,	and	host	regulatory	authoriOes	

— Type	of	business	

— Total	assets	

— Income	data	

— LocaOon	

— Intra-group	financial	transacOons	and	guarantees	

— Intra-group	operaOonal	dependencies	

— Membership	of	each	enOty	in	payment,	clearing	and	seVlement	systems	

— Tier	1	Common	Equity	RaOo	

— Liquid	Short-term	Funding	RaOo	

— PresumpOve	resoluOon	strategy	

16	
Recommendations (cont'd) 

✓ EnOOes	not	considered	material	should	be	listed	and	classified	in	

standardized	groups		

— Each	standardized	group	should	include	an	explanaOon	about	why	

such	enOOes	would	present	no	obstacle	to	an	orderly	resoluOon	

— With	each	standardized	group	each	enOty	in	group	should	be	idenOfied	

by	

*Name	

*LocaOon	

*Primary	funcOon		

*RaOonale	

✓ Foreign	branches	located	outside	the	jurisdicOon	in	which	the	enOty	is	

chartered	should	be	disclosed	

— During	a	crisis	a	foreign	branch	might	be	ring-fenced	and	treated	as	if	it	were	a	

subsidiary	in	resoluOon		

— IdenOfy	locaOon	of	branches,	principal	lines	of	business	and	assets	

✓ How	should	non-consolidated	variable	interest	enOOes	be	disclosed?	

— Currently	must	state	maximum	possible	loss	

17	
Recommendations (cont’d) 

✓ The	disclosure	of	relevant	data	in	other	public	filings	

should	be	reviewed	and	reconciled	to	increase	

transparency:	

— Annual	reports	and	SEC	filings	

— Results	of	stress	tesOng	and	other	supervisory	reports	

— Enhanced	disclosures	via	rulemaking	under	Dodd-Frank	Act	

§165(f)	

✓ ReporOng	objecOves	do	differ,	but	differences	should	

be	reconciled	

— Currently	even	something	as	basic	as	the	number	of	

subsidiaries	can	vary	markedly	across	reporOng	agencies	

18	
Sometimes significant differences 

19	

CiOgroup,	Yearend	2013	 JPMorgan	Chase	&Co,	Yearend	2013	

Sources:	Bankscope	(majority-owned	subsidiaries),	NaOonal	InformaOon	Center/Federal	Reserve,	

corporate	10-K	SEC	filing	for	2013.	

		
G-SIBs should meet higher global standards 

✓ U.S.	disclosure	standards	should	be	improved,	but	the	rest	of	the	

world	is	far	behind	even	current	US	standards	

— Only	the	U.S.	requires	any	disclosure	of	informaOon	in	living	wills	

— The	idenOficaOon	of	G-SIBs	is	an	internaOonal	undertaking	and	so	

transparency	should	be	enhanced	across	jurisdicOons	

✓ FSB	has	responsibility	for	designaOng	G-SIBs	

— Should	be	collecOng	this	informaOon	for	its	own	purposes	

— BeVer	disclosure	consistent	with	mission	to	set	global	standards	and	

enhance	market	discipline	

• Should	take	the	lead	in	harmonizing	definiOons,	ensuring	consistent	reporOng	

across	G-SIBs	

— Should	make	the	data	publicly	available	in	easily	researchable	form	via	

the	web	

• At	a	minimum	should	monitor	and	report	on	compliance	with	best	pracOces	in	

disclosure	

20	
*Support for this project was provided by the Systemic Risk Council, an independent and nonpartisan council formed by CFA Institute and The Pew Charitable Trusts to monitor and encourage 

regulatory reform of US capital markets focused on systemic risk. The views expressed should be 

attributed solely to the authors and do not necessarily reflect the views of the Systemic Risk 

Council, its members, or the supporting organizations. The authors are very grateful to a number of 

experts in the private and public sector who generously shared their insights with them.

These results are based on a preliminary draft of a report by 

Jacopo Carmassi and Richard Herring, 

Improving Resolvability of Systemically Important Banks: 

Mapping Corporate Structures and Exploring "Subsidiarization" as a Regulatory 

Tool to Preserve Financial Stability and Reduce Systemic Risk* 

21