70% less damage in case of financial collapse? The Hub knows the trick - CSH

70% less damage in case of financial collapse? The Hub knows the trick


Oct 9, 2020

Better dealing with systemic risk

 

With a simple method, Hub scientists were able to cut the potential damage caused by collapsing banks by up to 70 percent without negative impacts on the system as a whole.

 

The findings underline the importance of considering network effects in the financial sector. Future regulatory measures should include a focus on the connections between banks rather than on bank equity alone.

High systemic risk in financial systems? Re-arrange their networks!

 

After major banking crises, like the big crash in 2008, the world is always calling for better regulations. Traditionally, the focus was on increasing the equity capital of banks. Researchers at the Complexity Science Hub Vienna (CSH) question this stand-alone approach as it neglects the networks structure of the system. In a paper, recently published in the Journal of Economic Dynamics and Control, they investigated how much the damage of a systemic crash can be reduced solely by re-arranging the mutual connections between institutions. Their method shows “a surprisingly high optimization potential of up to 70 percent,” says PhD candidate Christian Diem, the first author of the study.

 

Re-arranging bank connections

 

“Banks don’t stand alone. They are linked to, and strongly dependent on, each other by financial contracts, for instance by credits,” Christian explains. Links create networks—in this case the interbanking network. Complexity science has proven that the systemic risk of any single bank as well as of the entire financial network depends on the distribution of links.

 

“We developed optimization algorithms to reallocate banking loans,” co-author Anton Pichler, one of our Junior Fellows, points out. “To avoid possible negative effects caused by this process, we added special conditions to the algorithms,” he says. On the one hand the scientists wanted to assure that the individual risk of a bank does not increase, on the other hand, that the total amount of loans in the network does not decline.

 

To test their approach, Christian, Anton, and co-author Stefan Thurner run their algorithms on an anonymized data set of the 70 largest banks in Austria. Together, these banks covered 71 percent of the country’s interbank market volume in the years 2008 to 2010.

 

They found that the systemic risk was especially high when large banks were closely linked. Yet, by re-allocating the lending partners, an entirely new network emerges: with a far lower risk for systemic failure, while the amount of money lent and borrowed in the network remains the same.

 

Systemic risk reduction

 

The term systemic risk describes the hypothetical effect of individual bank failures on the entire banking system. An example is the bankruptcy of Lehman Brothers in 2008. “Links allow a domino effect: The collapsing institution affects the other banks it is connected to, these banks, again, affect their neighbouring banks, and so on,” Anton explains. In a network with high systemic risk, the failure of a single knot has the potential to crush the whole system. This can be avoided by the redistribution of links. “High equity ratios in banks may make the falling of a single domino piece less likely. But if a bank collapses nonetheless, our method helps the other pieces not to fall as well,” adds Christian.

 

New ways of regulations

 

The findings have far-reaching implications for regulators and supervisory bodies such as the European Banking Authority EBA or the European Central Bank ECB.

 

“To reduce collapse risk, regulators must start with the networks,” emphasizes Stefan. “To achieve a comparable risk reduction of 70 percent by the increase of bank equity, you would have to raise equity levels by another 230 percent on average. This would be a huge burden on banks.”

 

Instead, the new approach could be of use for monitoring existing regulations: Do they actually reduce the systemic risk and make the network safer? “Regulators could even create a new kind of incentive to influence decision-making processes in the banks. We could design these incentives in a way that automatically leads to safer networks,” concludes the Hub president. An example for such a regulation is the Systemic Risk Tax (SRT) Stefan has proposed together with a colleague in 2016. The Systemic Risk Tax has shown to reduce the risk for a systemic collapse by up to 50 percent.

 

References:

 

C. DiemA. PichlerS. ThurnerWhat is the minimal systemic risk in financial exposure networks?, Journal of Economic Dynamics and Control Vol. 116 July (2020) 103900

 

S. Poledna, S. Thurner, Elimination of systemic risk in financial networks by means of a systemic risk transaction tax, Quantitative Finance Volume 16, Issue 10 (2016) 1599–1613

 


Press

Die Regierungsszenarien für einen Lockdown


Kurier, Oct 22, 2020

Press

Hotspot Deutschland [print]


Der Spiegel, Oct 17, 2020

Press

Erfahrungen aus COVID-19: “Wer den Mund aufmacht, verliert” [print]


Falter, Oct 21, 2020

Press

Kampf gegen Cluster


ORF 2 | Report, Oct 20, 2020

Publication

S. Mahtani-Williams, W. Fulton, A. Desvars-Larrive, et al.

Landscape Genomics of a Widely Distributed Snake, Dolichophis caspius (Gmelin, 1789) across Eastern Europe and Western Asia

Genes 11(10) (2020) 1218

News

Oct 9, 2020

70% less damage in case of financial collapse? The Hub knows the trick

News

Oct 8, 2020

AND THE WINNER IS: New data-driven method to fight corruption!

Publication

A. Chakraborty, Y. Ikeda

Testing “efficient supply chain propositions” using topological characterization of the global supply chain network

PLoS ONE 15(10) (2020) e0239669

Publication

J. Lasser, (...) J. Sorger

Complexity, transparency and time pressure: practical insights into science communication in times of crisis

Journal of Science Communication 19(05) (2020) N01

Publication

S. Thurner

Die Zerbrechlichkeit der Welt

(2020) edition a

News

Sep 25, 2020

Corona Traffic Light New shows details for EU regions

News

Sep 21, 2020

Austrian “Scientists of the Year”: More funding for blue sky research!

Press

Die Regierungsszenarien für einen Lockdown


Kurier, Oct 22, 2020

Press

Hotspot Deutschland [print]


Der Spiegel, Oct 17, 2020

Press

Erfahrungen aus COVID-19: “Wer den Mund aufmacht, verliert” [print]


Falter, Oct 21, 2020

Press

Kampf gegen Cluster


ORF 2 | Report, Oct 20, 2020

Publication

S. Mahtani-Williams, W. Fulton, A. Desvars-Larrive, et al.

Landscape Genomics of a Widely Distributed Snake, Dolichophis caspius (Gmelin, 1789) across Eastern Europe and Western Asia

Genes 11(10) (2020) 1218

News

Oct 9, 2020

70% less damage in case of financial collapse? The Hub knows the trick

News

Oct 8, 2020

AND THE WINNER IS: New data-driven method to fight corruption!

Publication

A. Chakraborty, Y. Ikeda

Testing “efficient supply chain propositions” using topological characterization of the global supply chain network

PLoS ONE 15(10) (2020) e0239669

Publication

J. Lasser, (...) J. Sorger

Complexity, transparency and time pressure: practical insights into science communication in times of crisis

Journal of Science Communication 19(05) (2020) N01

Publication

S. Thurner

Die Zerbrechlichkeit der Welt

(2020) edition a

News

Sep 25, 2020

Corona Traffic Light New shows details for EU regions

News

Sep 21, 2020

Austrian “Scientists of the Year”: More funding for blue sky research!

News

Oct 9, 2020

70% less damage in case of financial collapse? The Hub knows the trick

News

Oct 8, 2020

AND THE WINNER IS: New data-driven method to fight corruption!

News

Sep 25, 2020

Corona Traffic Light New shows details for EU regions

News

Sep 21, 2020

Austrian “Scientists of the Year”: More funding for blue sky research!

News

Sep 4, 2020

Blog | Marcia Ferreira: “Measuring researcher mobility across institutions”

News

Aug 27, 2020

CCCSL: published in prominent company

News

Aug 24, 2020

Why COVID-19 infection curves behave so unexpectedly [EN, D]

News

Aug 3, 2020

Crazy ideas, brilliant minds, good times!

News

Jul 29, 2020

Corona | How far we move [June & July]

News

Jul 22, 2020

New CSH group leader predicted US unrest

News

Jul 17, 2020

When emotions go viral: analysis of the COVID-19 Infodemic

News

Jul 16, 2020

Blog | Marcia Ferreira: “Sentiment in news about COVID-19 research”

Press

Die Regierungsszenarien für einen Lockdown


Kurier, Oct 22, 2020

Press

Hotspot Deutschland [print]


Der Spiegel, Oct 17, 2020

Press

Erfahrungen aus COVID-19: “Wer den Mund aufmacht, verliert” [print]


Falter, Oct 21, 2020

Press

Kampf gegen Cluster


ORF 2 | Report, Oct 20, 2020

Press

Neue Corona-Karte des CSH zeigt Risiko EU-weit auf Bezirksebene an


Der Brutkasten, Sep 24, 2020

Press

Gefahr von Clustern in Alten- und Pflegeheimen


ORF 2 | Aktuell nach Eins, Oct 20, 2020

Press

Wirksamkeit der CoV-Maßnahmen


ORF2 | Konkret, Oct 19, 2020

Press

“In unserer Blase haben wir es so bequem”


Die Presse, Oct 18, 2020

Press

Coronapolitik: Was ist der Plan?


Die Presse, Oct 17, 2020

Press

Różne kraje różnie reagowały na epidemię. Naukowcy zestawili to w całość [Polish]


ddb24, Oct 17, 2020

Press

Warum jetzt droht, was alle ausgeschlossen haben


Der Spiegel , Oct 16, 2020

Press

Steigende Infektionszahlen: “Wir dürfen uns jetzt nicht zu Tode fürchten”


Kurier, Oct 16, 2020

Publication

S. Mahtani-Williams, W. Fulton, A. Desvars-Larrive, et al.

Landscape Genomics of a Widely Distributed Snake, Dolichophis caspius (Gmelin, 1789) across Eastern Europe and Western Asia

Genes 11(10) (2020) 1218

Publication

A. Chakraborty, Y. Ikeda

Testing “efficient supply chain propositions” using topological characterization of the global supply chain network

PLoS ONE 15(10) (2020) e0239669

Publication

J. Lasser, (...) J. Sorger

Complexity, transparency and time pressure: practical insights into science communication in times of crisis

Journal of Science Communication 19(05) (2020) N01

Publication

S. Thurner

Die Zerbrechlichkeit der Welt

(2020) edition a

Publication

C. Deischinger, E. Dervic, M. Leutner, L. Kosi-Trebotic, P. Klimek, A. Kautzky-Willer

Diabetes mellitus is associated with a higher risk for major depressive disorder in women than in men

BMJ Open Diab Res Care 8 (2020) e001430

Publication

H. Krichene, H. Inoue, T. Isogai, A. Chakraborty

A model for indirect losses of negatives shocks in production and finance

PLoS ONE 15(9) (2020) e0239293

Publication

Ž. Tomovski, J. Dubbeldam, J. Korbel

Applications of Hilfer-Prabhakar operator to option pricing financial model

Fractional Calculus and Applied Analysis, Band 23, Heft 4 (2020)

Publication

R. M. del Rio-Chanona, P. Mealy, A. Pichler, F. Lafond, J. D. Farmer

Supply and demand shocks in the COVID-19 pandemic: an industry and occupation perspective

Oxford Review of Economic Policy (2020) graa033

Publication

J. Kertész, J. Wachs

Complexity science approach to economic crime

Nature Reviews Physics (2020)

Publication

A. Chakraborty, H. Inoue, Y. Fujiwara

Economic complexity of prefectures in Japan

PLoS ONE 15(8) (2020) e0238017

Publication

A. Desvars-Larrive, E. Dervic, N. Haug, et al.

A structured open dataset of government interventions in response to COVID-19

Scientific Data Vol 7 (2020) Art no. 285

Publication

S. Thurner, P. Klimek, R. Hanel

A network-based explanation of why most COVID-19 infection curves are linear

PNAS Aug 24 (2020)