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
Later during this century, around 2060, a paradigm shift in global energy consumption is expected: we will spend more energy for cooling than for heating....
Researchers from the Department of Atomically Resolved Dynamics of the Max Planck Institute for the Structure and Dynamics of Matter (MPSD) at the Center for Free-Electron Laser Science in Hamburg, the University of Potsdam (both in Germany) and the University of Toronto (Canada) have pieced together a detailed time-lapse movie revealing all the major steps during the catalytic cycle of an enzyme. Surprisingly, the communication between the protein units is accomplished via a water-network akin to a string telephone. This communication is aligned with a ‘breathing’ motion, that is the expansion and contraction of the protein.
This time-lapse sequence of structures reveals dynamic motions as a fundamental element in the molecular foundations of biology.
Two research teams have succeeded simultaneously in measuring the long-sought Thorium nuclear transition, which enables extremely precise nuclear clocks. TU Wien (Vienna) is part of both teams.
If you want to build the most accurate clock in the world, you need something that "ticks" very fast and extremely precise. In an atomic clock, electrons are...
Researchers from Chalmers University of Technology have demonstrated a detector made from graphene that could revolutionize the sensors used in next-generation space telescopes. The findings were recently published in the scientific journal Nature Astronomy.
Beyond superconductors, there are few materials that can fulfill the requirements needed for making ultra-sensitive and fast terahertz (THz) detectors for...
A supersolid is a state of matter that can be described in simplified terms as being solid and liquid at the same time. In recent years, extensive efforts have been devoted to the detection of this exotic quantum matter. A research team led by Tilman Pfau and Tim Langen at the 5th Institute of Physics of the University of Stuttgart has succeeded in proving experimentally that the long-sought supersolid state of matter exists. The researchers report their results in Nature magazine.
In our everyday lives, we are familiar with matter existing in three different states: solid, liquid, or gas. However, if matter is cooled down to extremely...
10.09.2019 | Event News
04.09.2019 | Event News
29.08.2019 | Event News
16.09.2019 | Life Sciences
16.09.2019 | Materials Sciences
16.09.2019 | Health and Medicine