The motives for financial complexity: An empirical investigation

This paper investigates the motives for financial complexity by focusing on a large market of investment products exclusively targeted to households. We develop a robust measure of complexity by performing a text analysis of the term sheets of 55,000 retail structured products issued in 17 European countries since 2002. We first find that the complexity of structured products has significantly increased over the period 2002-2010. Second, calculating the fair value of a subsample of products, we show that relatively more complex products have higher markups. Third, the headline rate offered by a product is an increasing function of its complexity. Fourth, distributors targeting low-income investors, such as savings banks, offer relatively more complex products. Fifth, competition amplifies rather than mitigates the migration towards higher complexity. These findings are diffcult to fully reconcile with a completing market motive for financial complexity, while being more consistent with banks catering to yield seeking investors, or developing obfuscation strategies