Efficiency and Stability of a Financial Architecture with Too-Interconnected-to-Fail Institutions

Add to your list(s) Download to your calendar using vCal

• Gofman, M (University of Wisconsin-Madison)
• Thursday 28 August 2014, 14:30-15:00
• Seminar Room 1, Newton Institute.

If you have a question about this talk, please contact Mustapha Amrani.

Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches

How to regulate large interconnected financial institutions has become a key policy question. To make the financial architecture more stable regulators have proposed to limit the size and connections of these institutions. I calibrate a network-based model of an over-the-counter market and infer the hidden financial architecture based on bilateral trades in the Federal funds market. A comparison of the calibrated architecture to nine counterfactual architectures reveals that that efficiency of liquidity allocation decreases and the risk of endogenous contagion increases non-monotonically as banks face limits on the number of trading partners. I also find that in a less concentrated architecture more banks trigger a large cascade of failures, and it is more difficult to identify these banks ex-ante. Overall, my results suggest it is not optimal to restrict the number of connections of too-interconnected-to-fail banks because it can result in a financial architecture that is less efficient, more fragile, and harder to monitor.

This talk is part of the Isaac Newton Institute Seminar Series series.

This talk is included in these lists:

• All CMS events
• Featured lists
• INI info aggregator
• Isaac Newton Institute Seminar Series
• School of Physical Sciences
• Seminar Room 1, Newton Institute
• bld31

Note that ex-directory lists are not shown.