Financial regulators and policy makers should focus on financial institutions that are ‘too central to fail’ as well as those that are ‘too big to fail’, research published in Scientific Reports this week suggests. T. Inspired by feedback-centrality measures in networks, such as PageRank, Stefano Battiston and colleagues in the Systems Design research team at ETH Zurich, Switzerland introduce a new measure of systemic impact, which they call DebtRank. They use DebtRank to analyze a recently released data set with information on the institutions that received aid from the US Federal Reserve Bank through its US$1.2 trillion emergency loans programmes from 2008 to 2010. The authors find that during the peak of the crisis, a group of 22 financial institutions, which received most of the loans, became more central to the network, which means that the default of each one would have a larger economic impact on the whole network. Even small, dispersed shocks to individual banks could thus have triggered the default of a large portion of the system. The authors note that because the network of impact used in the study is a proxy of the real, unknown network, the findings should be regarded with caution, but the study shows the kinds of insights that can be gained using DebtRank. Click on image or title to learn more.
Scooped by Phillip Trotter |
Smith's comment August 10, 2012 6:20 PM
Cool finding..so it look that it is not enough to control for the big banks...also the relatively small banks can trigger a systemic default...!
Phillip Trotter's comment,
August 14, 2012 5:59 PM
hi S. Its related to how the different banks are interconnected in networks. There is a good article explaining how page rank and similar network feedback metric systems can be applied to ecosystems to identify key species that sustain that ecosystem. (see http://carbon-based-ghg.blogspot.fr/2009/09/modifying-googles-page-rank-algorithm.html) The same concept occurs in debt rank - size doesn't always matter - its the domino effect and dependency chains with other organizations or degree of network connectivity that impacts the ecosystem. A large or small private bank can fail - if it is relatively independent - then its simply an isolated bank. Think Bairings in the UK - its failure due to Leeson's trading didn't cause a systemic failure because it was largely an independent bank. However the Sarakin scandal in Japan in the 1970's and 80's threatened the failure of a number of international banks who were connected through loans and loan guarantees. The financial crisis of the the last decade is similar - the degree of network connectedness on subprime products and underwriting made the entire banking sector susceptible. Applying ecological modeling tools and topology tools like network analysis - can help a lot in understanding the current financial crisis.
Sign up to comment