Berlin 2018 – wissenschaftliches Programm
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SOE: Fachverband Physik sozio-ökonomischer Systeme
SOE 7: Poster
SOE 7.9: Poster
Montag, 12. März 2018, 17:00–20:00, Poster E
Fire-walling banks and assets: A network based approach — Sasidevan Vijayakumar1 and •Nils Bertschinger2 — 1Cochin University of Science and Technology, Cochin, India. — 2Frankfurt Institute for Advanced Studies, Frankfurt am Main
Foreseeing and preventing cascading failures in a financial network is a primary concern in the present era of ever increasing complexity and connectivity in finance. Apart from direct contagion spreading via counter-parties defaulting, another important mechanism by which defaults can propagate in a network of banks is via ‘fire-sales’ of assets. The initial reasons for such a fire sale could be portfolio constraints, either set by a regulatory authority or due to acute financing needs. Asset liquidation by a bank then depreciate asset prizes and thereby put pressure on the balance sheet of other banks holding the same assets. The latter may then be forced to liquidate its assets thereby triggering further rounds of fire sales.
In this work, we use a quantitative framework to model such ‘asset-price-contagion’ on a bipartite network consisting of banks and assets. We propose a general centrality measure for this dynamic process which captures the systemic importance of banks as well as assets in the network. Using data from European Banking Authority (EBA), we show that bailing out banks and/or active buying of assets by an agency based on our centrality measure could significantly reduce the probability and extent of contagion. Yet, even such targeted interventions either cannot fully prevent contagion as it exhibits an all-or-nothing phenomenon or incur substantial implementation costs.