Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Risk of financial crisis higher than previously estimated

02.09.2015

The risk of a financial crisis is substantially higher than previously estimated, according to new research that accounts for multiple levels of interconnectedness in the financial system.

The study, published in the journal Financial Stability, introduces a new method that allows researchers to estimate the systemic risk that emerge from multiple layers of connectivity.

“Systemic risk is the risk that a significant part of the financial system stops working—that it cannot perform its function,” says IIASA Advanced Systems Analysis program researcher Sebastian Poledna, who led the study. For example if a major bank fails, it could trigger the failure of other financial institutions that are linked to it through loans, derivatives, securities, and foreign exchange exposure. The fear of such contagion is what drives governments to bail out banks.

“Previous studies of systemic risk had just examined one layer of this system, the interbank loans,” says Poledna. The new study expands this to include three other layers of connectivity: derivatives, securities, and foreign exchange. By including the other layers, Poledna and colleagues found that the actual risk was 90% higher than the risk just from interbank loans.

Currently, financial regulators tend to use market-based measures to estimate systemic risk. The researchers find that these measures also underestimate the actual risk. In Mexico, which the researchers used as a case study, they found that systemic risk levels are about four times higher today than before the financial crisis—yet these risks are not reflected in market-based measures.

“Banks today are far more connected than they were before the financial crisis,” explains Poledna. “This means that in a new crisis, the public costs for Mexico could be four times higher than those experienced in the last crisis,”
The new method would make it possible to create systemic risk profiles for markets and individual institutions, which could prove useful for financial regulators aiming to prevent future crises.

In addition, the methodology provides a way to estimate the cost and repercussions of a bank failure, which could help financial policymakers determine whether a bailout would be worth the cost. Bank bailouts come at a huge cost to taxpayers, yet until now, there has been no clear method of determining the cost to the system of not bailing out a failing bank.

Poledna points out that the new method may still underestimate systemic risk, as it leaves out two additional potential sources of risk – overlapping investment portfolios, and funding liquidity. The researchers are now working in collaboration with the IIASA Risk, Policy and Vulnerability program on a new study that brings in these additional layers.

The study relied on data from the Mexican banking system but the researchers say that the method could be used for any country, as long as the data were available.

Reference:
Poledna A. Molina-Borboa JL, Martinez-Jaramillo S, van der Leij M, Thurner S (2015). The multi-layer network nature of systemic risk and its implications for the costs of financial crises. Financial Stability.

For more information contact:

Sebastian Poledna
Research Scholar
Risk Policy and Vulnerability
Advanced Systems Analysis
+43(0) 2236 807 261
poledna@iiasa.ac.at

Stefan Thurner
Senior Research Scholar
Advanced Systems Analysis
+43(0) 2236 807 380
thurner@iiasa.ac.at

Weitere Informationen:

http://dx.doi.org/10.1016/j.jfs.2015.08.001

MSc Katherine Leitzell | idw - Informationsdienst Wissenschaft
Further information:
http://www.iiasa.ac.at

More articles from Studies and Analyses:

nachricht Europe’s Demographic Future. Where the Regions Are Heading after a Decade of Crises
10.08.2017 | Berlin-Institut für Bevölkerung und Entwicklung

nachricht Scientists reveal source of human heartbeat in 3-D
07.08.2017 | University of Manchester

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Fizzy soda water could be key to clean manufacture of flat wonder material: Graphene

Whether you call it effervescent, fizzy, or sparkling, carbonated water is making a comeback as a beverage. Aside from quenching thirst, researchers at the University of Illinois at Urbana-Champaign have discovered a new use for these "bubbly" concoctions that will have major impact on the manufacturer of the world's thinnest, flattest, and one most useful materials -- graphene.

As graphene's popularity grows as an advanced "wonder" material, the speed and quality at which it can be manufactured will be paramount. With that in mind,...

Im Focus: Exotic quantum states made from light: Physicists create optical “wells” for a super-photon

Physicists at the University of Bonn have managed to create optical hollows and more complex patterns into which the light of a Bose-Einstein condensate flows. The creation of such highly low-loss structures for light is a prerequisite for complex light circuits, such as for quantum information processing for a new generation of computers. The researchers are now presenting their results in the journal Nature Photonics.

Light particles (photons) occur as tiny, indivisible portions. Many thousands of these light portions can be merged to form a single super-photon if they are...

Im Focus: Circular RNA linked to brain function

For the first time, scientists have shown that circular RNA is linked to brain function. When a RNA molecule called Cdr1as was deleted from the genome of mice, the animals had problems filtering out unnecessary information – like patients suffering from neuropsychiatric disorders.

While hundreds of circular RNAs (circRNAs) are abundant in mammalian brains, one big question has remained unanswered: What are they actually good for? In the...

Im Focus: RAVAN CubeSat measures Earth's outgoing energy

An experimental small satellite has successfully collected and delivered data on a key measurement for predicting changes in Earth's climate.

The Radiometer Assessment using Vertically Aligned Nanotubes (RAVAN) CubeSat was launched into low-Earth orbit on Nov. 11, 2016, in order to test new...

Im Focus: Scientists shine new light on the “other high temperature superconductor”

A study led by scientists of the Max Planck Institute for the Structure and Dynamics of Matter (MPSD) at the Center for Free-Electron Laser Science in Hamburg presents evidence of the coexistence of superconductivity and “charge-density-waves” in compounds of the poorly-studied family of bismuthates. This observation opens up new perspectives for a deeper understanding of the phenomenon of high-temperature superconductivity, a topic which is at the core of condensed matter research since more than 30 years. The paper by Nicoletti et al has been published in the PNAS.

Since the beginning of the 20th century, superconductivity had been observed in some metals at temperatures only a few degrees above the absolute zero (minus...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Call for Papers – ICNFT 2018, 5th International Conference on New Forming Technology

16.08.2017 | Event News

Sustainability is the business model of tomorrow

04.08.2017 | Event News

Clash of Realities 2017: Registration now open. International Conference at TH Köln

26.07.2017 | Event News

 
Latest News

Researchers devise microreactor to study formation of methane hydrate

23.08.2017 | Materials Sciences

ShAPEing the future of magnesium car parts

23.08.2017 | Automotive Engineering

New insights into the world of trypanosomes

23.08.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>