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.
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/]
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
MSc Katherine Leitzell | idw - Informationsdienst Wissenschaft
Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik
RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung
DESY and MPSD scientists create high-order harmonics from solids with controlled polarization states, taking advantage of both crystal symmetry and attosecond electronic dynamics. The newly demonstrated technique might find intriguing applications in petahertz electronics and for spectroscopic studies of novel quantum materials.
The nonlinear process of high-order harmonic generation (HHG) in gases is one of the cornerstones of attosecond science (an attosecond is a billionth of a...
Nano- and microtechnology are promising candidates not only for medical applications such as drug delivery but also for the creation of little robots or flexible integrated sensors. Scientists from the Max Planck Institute for Polymer Research (MPI-P) have created magnetic microparticles, with a newly developed method, that could pave the way for building micro-motors or guiding drugs in the human body to a target, like a tumor. The preparation of such structures as well as their remote-control can be regulated using magnetic fields and therefore can find application in an array of domains.
The magnetic properties of a material control how this material responds to the presence of a magnetic field. Iron oxide is the main component of rust but also...
Due to the special arrangement of its molecules, a new coating made of corn starch is able to repair small scratches by itself through heat: The cross-linking via ring-shaped molecules makes the material mobile, so that it compensates for the scratches and these disappear again.
Superficial micro-scratches on the car body or on other high-gloss surfaces are harmless, but annoying. Especially in the luxury segment such surfaces are...
The Potsdam Echelle Polarimetric and Spectroscopic Instrument (PEPSI) at the Large Binocular Telescope (LBT) in Arizona released its first image of the surface magnetic field of another star. In a paper in the European journal Astronomy & Astrophysics, the PEPSI team presents a Zeeman- Doppler-Image of the surface of the magnetically active star II Pegasi.
A special technique allows astronomers to resolve the surfaces of faraway stars. Those are otherwise only seen as point sources, even in the largest telescopes...
Researchers at Chalmers University of Technology and the University of Gothenburg, Sweden, have proposed a way to create a completely new source of radiation. Ultra-intense light pulses consist of the motion of a single wave and can be described as a tsunami of light. The strong wave can be used to study interactions between matter and light in a unique way. Their research is now published in the scientific journal Physical Review Letters.
"This source of radiation lets us look at reality through a new angle - it is like twisting a mirror and discovering something completely different," says...
11.03.2019 | Event News
01.03.2019 | Event News
28.02.2019 | Event News
22.03.2019 | Life Sciences
22.03.2019 | Life Sciences
22.03.2019 | Information Technology