Systemic Risk: Fire-Walling Financial Systems Using Network-Based Approaches
The latest financial crisis has painfully revealed the dangers arising from a globally interconnected financial system. Conventional approaches based on the notion of the existence of equilibrium and those which rely on statistical forecasting have seen to be inadequate to describe financial systems...
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| Main Authors: | , |
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| Format: | Journal Article |
| Language: | English |
| Published: |
11-12-2019
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| Subjects: | |
| Online Access: | Get full text |
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| Summary: | The latest financial crisis has painfully revealed the dangers arising from a
globally interconnected financial system. Conventional approaches based on the
notion of the existence of equilibrium and those which rely on statistical
forecasting have seen to be inadequate to describe financial systems in any
reasonable way. A more natural approach is to treat financial systems as
complex networks of claims and obligations between various financial
institutions present in an economy. The generic framework of complex networks
has been successfully applied across several disciplines, e.g., explaining
cascading failures in power transmission systems and epidemic spreading. Here
we review various network models addressing financial contagion via direct
inter-bank contracts and indirectly via overlapping portfolios of financial
institutions. In particular, we discuss the implications of the
"robust-yet-fragile" nature of financial networks for cost-effective regulation
of systemic risk. |
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| DOI: | 10.48550/arxiv.1912.05273 |