Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Mathematical confirmation: Rewiring financial networks reduces systemic risk

22.06.2017

A proposed tax on systemically risky financial transactions could reduce the risk of financial system crashes by spurring financial networks to reshape in more resilient ways.

A tax on systemically risky transactions could reshape financial networks into a new structure that is less vulnerable to cascading financial system shocks such as the 2008 financial crisis, according to new IIASA research published in the Journal of Economic Dynamics and Control.


This graph shows the distribution of the systemic impact of banks in the simulated network, with no tax (red), a Tobin-like tax (blue) and the SRT (green).

©Leduc & Thurner, 2017

By taxing the transactions that create greater risk of network failure, the tax, known as a Systemic Risk Tax (SRT), would essentially rewire the financial system into a more resilient form.

The SRT was introduced in previous research by IIASA researchers Sebastian Poledna and Stefan Thurner, where they showed its validity on a large-scale agent based simulator. The new research now shows that the idea of the SRT holds much more generally on fundamental mathematical grounds.

“The idea behind this tax is to create incentives for banks to form a more resilient network,” says IIASA researcher Matt Leduc, a study author. In the modern financial system, banks are connected to each other through transactions such as lending and borrowing. In this highly connected system, if one bank fails, this can lead to a cascade of bank failures.

In the current regulatory system there are no real incentives to reduce systemic risk, which means that finance remains vulnerable to future shocks and crises. Even new “Tobin style” transaction taxes that have been proposed and introduced following the 2008 financial crisis do not do much to reduce systemic risk, according to previous research. Leduc explains that this is because such taxes are charged indiscriminately on every transaction, rather than targeting the transactions that increase risk.

“Transaction taxes also tend to reduce transaction volume overall, which is not what you want in the banking system. The fascinating thing about the SRT is that it does not reduce volume, but just re-shapes the network,” says Thurner, a study author. An SRT could rewire the financial network into a new, more resilient structure that could better withstand shocks and bank failures.

The recent findings on the proposed systemic risk tax brings the previous body of work onto a new level, by showing that there exist two equilibria, one is basically free of systemic risk when the SRT is implemented, the other is the situation without SRT where the risk of crises and cascading risk is high, as it is in reality now. This is based on firm mathematical grounds. “We adapted and proved results inspired by the study of ‘matching markets,’ which allows us to capture mathematically the matchmaking processes between lenders and borrowers. With this method we can arrive at networks that are optimally resilient,” says Leduc.

Thurner has previously presented the research to policymakers and central bankers in the EU and Mexico. The new study is essentially one further step from research into policy, but a systemic risk tax still has a long way to go to become reality. In order to implement such a tax, regulators need expansive, up-to-date information about the current state of the interbank network. In fact, this information is already available and accessible to regulators. The bigger question may be how banks would behave in reality under the proposed tax.

“We need to explore how real banks will behave when faced with such a tax, and how they will change their behavior in response. The idea is to make banks aware and responsible for the externalities of systemic risk they are creating. Of course this will create opportunity costs as banks might create systemic risk departments. However, these are negligible costs in comparison to the costs of financial crises, or implementation costs of Basel III, which will effectively not reduce systemic risk,” explains Thurner.

Leduc MV and Thurner S (2017). Incentivizing resilience in financial networks. Journal of Economic Dynamics and Control 82 44-66. [pure.iiasa.ac.at/14630/]

About IIASA:
The International Institute for Applied Systems Analysis (IIASA) is an international scientific institute that conducts research into the critical issues of global environmental, economic, technological, and social change that we face in the twenty-first century. Our findings provide valuable options to policymakers to shape the future of our changing world. IIASA is independent and funded by prestigious research funding agencies in Africa, the Americas, Asia, Europe, and Oceania. www.iiasa.ac.at

Weitere Informationen:

http://pure.iiasa.ac.at/14630/

MSc Katherine Leitzell | idw - Informationsdienst Wissenschaft

Further reports about: Analysis Economic IIASA SRT bank failures financial crisis financial system networks risk systemic

More articles from Business and Finance:

nachricht Corporate coworking as a driver of innovation
22.11.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

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

Im Focus: Towards data storage at the single molecule level

The miniaturization of the current technology of storage media is hindered by fundamental limits of quantum mechanics. A new approach consists in using so-called spin-crossover molecules as the smallest possible storage unit. Similar to normal hard drives, these special molecules can save information via their magnetic state. A research team from Kiel University has now managed to successfully place a new class of spin-crossover molecules onto a surface and to improve the molecule’s storage capacity. The storage density of conventional hard drives could therefore theoretically be increased by more than one hundred fold. The study has been published in the scientific journal Nano Letters.

Over the past few years, the building blocks of storage media have gotten ever smaller. But further miniaturization of the current technology is hindered by...

Im Focus: Successful Mechanical Testing of Nanowires

With innovative experiments, researchers at the Helmholtz-Zentrums Geesthacht and the Technical University Hamburg unravel why tiny metallic structures are extremely strong

Light-weight and simultaneously strong – porous metallic nanomaterials promise interesting applications as, for instance, for future aeroplanes with enhanced...

Im Focus: Virtual Reality for Bacteria

An interdisciplinary group of researchers interfaced individual bacteria with a computer to build a hybrid bio-digital circuit - Study published in Nature Communications

Scientists at the Institute of Science and Technology Austria (IST Austria) have managed to control the behavior of individual bacteria by connecting them to a...

Im Focus: A space-time sensor for light-matter interactions

Physicists in the Laboratory for Attosecond Physics (run jointly by LMU Munich and the Max Planck Institute for Quantum Optics) have developed an attosecond electron microscope that allows them to visualize the dispersion of light in time and space, and observe the motions of electrons in atoms.

The most basic of all physical interactions in nature is that between light and matter. This interaction takes place in attosecond times (i.e. billionths of a...

Im Focus: A transistor of graphene nanoribbons

Transistors based on carbon nanostructures: what sounds like a futuristic dream could be reality in just a few years' time. An international research team working with Empa has now succeeded in producing nanotransistors from graphene ribbons that are only a few atoms wide, as reported in the current issue of the trade journal "Nature Communications."

Graphene ribbons that are only a few atoms wide, so-called graphene nanoribbons, have special electrical properties that make them promising candidates for the...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

AKL’18: The opportunities and challenges of digitalization in the laser industry

07.12.2017 | Event News

Blockchain is becoming more important in the energy market

05.12.2017 | Event News

Ecology Across Borders: International conference brings together 1,500 ecologists

15.11.2017 | Event News

 
Latest News

NASA's SuperTIGER balloon flies again to study heavy cosmic particles

07.12.2017 | Physics and Astronomy

UChicago scientists craft world's tiniest interlinking chains

07.12.2017 | Life Sciences

Study reveals significant role of dust in mountain ecosystems

07.12.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>