We consider the problem of governing systemic risk in an assets-liabilities dynamical model of banking system. In the model considered each bank is represented by its assets and its liabilities.The capital reserves of a bank are the difference between assets and liabilities of the bank. A bank is solvent when its capit…
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48 results for “banking system”
We report a study of a stylized banking cascade model investigating systemic risk caused by counter party failure using liabilities and assets to define banks' balance sheet. In our stylized system, banks can be in two states: normally operating or distressed and the state of a bank changes from normally operating to d…
Unveiling Early Warning Signals of Systemic Risks in Banks: A Recurrence Network-Based Approachq-fin.RM
This study uses high-frequency data to identify early warning signals for bank crises.
problem Identifying early warning signals for impending bank crises.
method Constructing multiple recurrence networks (MRNs) based on high-frequency stock returns to monitor nonlinear dynamics.
result Key indicators of MRNs, particularly average mutual information, provide valuable insights into periods of extreme volatility.
We consider the problem of governing systemic risk in a banking system model. The banking system model consists in an initial value problem for a system of stochastic differential equations whose dependent variables are the log-monetary reserves of the banks as functions of time. The banking system model considered gen…
An asset network systemic risk (ANWSER) model is presented to investigate the impact of how shadow banks are intermingled in a financial system on the severity of financial contagion. Particularly, the focus of this study is the impact of the following three representative topologies of an interbank loan network betwee…
Study models systemic risks in BRICS banks under geopolitical shocks.
problem Systemic risks in BRICS banks under geopolitical shocks.
method Dynamic Time Warping, Temporal Graph Neural Network, Agent-Based Model.
result Geopolitical shocks cause more systemic damage than bank failures.
As economic entities become increasingly interconnected, a shock in a financial network can provoke significant cascading failures throughout the system. To study the systemic risk of financial systems, we create a bi-partite banking network model composed of banks and bank assets and propose a cascading failure model …
Identifying systemically important companies in the entire liability network of a small open economyq-fin.RM
To a large extent, the systemic importance of financial institutions is related to the topology of financial liability networks. In this work we reconstruct and analyze the - to our knowledge - largest financial network that has been studied up to now. This financial liability network consists of 51,980 firms and 796 b…
Centralized systemic risk control in the interbank system: Weak formulation and Gamma-convergencemath.OC
Paper studies central bank's strategy to control systemic risk in interbank system.
problem Minimizing average distance between log-monetary reserves and target levels.
method Weak formulation, Ekeland's variational principle, Gamma-convergence, stochastic Fokker-Planck-Kolmogorov equation.
result Proves convergence of optimal strategies as number of banks increases.
Derivatives impact U.S. banking sector's systemic risk, but loan and leverage ratios are more significant.
problem Systemic risk in U.S. banking sector due to derivatives and loans.
method Analysis of derivatives and loan data to assess systemic risk.
result Loan and leverage ratios are more influential in systemic risk than derivatives holdings.
We propose a simple model of inter-bank borrowing and lending where the evolution of the log-monetary reserves of banks is described by a system of diffusion processes coupled through their drifts in such a way that stability of the system depends on the rate of inter-bank borrowing and lending. Systemic risk is ch…
The negative externalities from an individual bank failure to the whole system can be huge. One of the key purposes of bank regulation is to internalize the social costs of potential bank failures via capital charges. This study proposes a method to evaluate and allocate the systemic risk to different countries/regions…
Complex non-linear interactions between banks and assets we model by two time-dependent Erdős Renyi network models where each node, representing bank, can invest either to a single asset (model I) or multiple assets (model II). We use dynamical network approach to evaluate the collective financial failure---systemic ri…
We study the incentives of banks in a financial network, where the network consists of debt contracts and credit default swaps (CDSs) between banks. One of the most important questions in such a system is the problem of deciding which of the banks are in default, and how much of their liabilities these banks can pay. W…
Structured factor copulas for modeling the systemic risk of European and United States banksq-fin.ST
The paper models systemic risk in European and U.S. banks using factor copulas.
problem Modeling the joint and conditional distress probabilities of banks across Europe and the U.S.
method Employing Credit Default Swaps (CDS) and factor copulas, the paper proposes multi-factor, structured factor, and factor-vine models.
result Systematic contagion channel drives distress probabilities in the banking system as a whole, while regional factors are important within each region.
Study shows how capital constraints can lead to systemic crises in financial systems.
problem Impact of regulatory capital constraints on fire sales and financial stability.
method Mean field game model with banks adjusting holdings via trading strategies under regulatory constraints.
result Capital constraints can lead to simultaneous defaults in a substantial proportion of the banking system.
The study compares profitability of conventional and Islamic banks in Bangladesh.
problem Evaluating profitability of commercial banks in Bangladesh.
method Examined bank-specific, industry-specific, and banking system factors on profitability.
result Islamic banks consistently outperform conventional banks in profitability.
Systemic risk in banking systems remains a crucial issue that it has not been completely understood. In our toy model, banks are exposed to two sources of risks, namely, market risk from their investments in assets external to the banking system and credit risk from their lending in the interbank market. By and large, …
Study examines large banks' role in interbank markets using game theory.
problem Understanding systemic risk in interbank markets with large banks.
method Mean-field game framework, convex analysis, Monte Carlo simulations.
result Large banks can positively or negatively impact market stability.
A framework for simulating systemic risk and its application to the South African banking sectorq-fin.RM
We present a network-based framework for simulating systemic risk that considers shock propagation in banking systems. In particular, the framework allows the modeller to reflect a top-down framework where a shock to one bank in the system affects the solvency and liquidity position of other banks, through systemic mar…
Paper introduces a specialized text classification system for French Open Banking transactions.
problem Classifying specialized banking text data with high accuracy and efficiency.
method Data collection, labeling, preprocessing, modeling, and evaluation stages with language-specific techniques.
result Enhanced performance and efficiency compared to generic approaches.
This study presents an ANWSER model (asset network systemic risk model) to quantify the risk of financial contagion which manifests itself in a financial crisis. The transmission of financial distress is governed by a heterogeneous bank credit network and an investment portfolio of banks. Bankruptcy reproductive ratio …
A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central banks as system stabilizers and liquidity providers is elucidated. It is shown how…
We consider a model of financial contagion in a bipartite network of assets and banks recently introduced in the literature, and we study the effect of power law distributions of degree and balance-sheet size on the stability of the system. Relative to the benchmark case of banks with homogeneous degrees and balance-sh…
Contagion Flow Through Banking Networkscond-mat.other
Based on an empirical analysis of the network structure of the Austrian inter-bank market, we study the flow of funds through the banking network following exogenous shocks to the system. These shocks are implemented by stochastic changes in variables like interest rates, exchange rates, etc. We demonstrate that the sy…
This paper presents a description of the mechanical operations of banking as used in modern banking systems regulated under the Basel Accords, in order to provide support for a verifiable and complete description of the banking system suitable for computer simulation. Feedback is requested on the contents of this docum…
It had been believed in the conventional practice that the risk of a bank going bankrupt is lessened in a straightforward manner by transferring the risk of loan defaults. But the failure of American International Group in 2008 posed a more complex aspect of financial contagion. This study presents an extension of the …
We propose an interacting particle system to model the evolution of a system of banks with mutual exposures. In this model, a bank defaults when its normalized asset value hits a lower threshold, and its default causes instantaneous losses to other banks, possibly triggering a cascade of defaults. The strength of this …
Threadneedle is a multi-agent simulation framework, based on a full double entry book keeping implementation of the banking system's fundamental transactions. It is designed to serve as an experimental test bed for economic simulations that can explore the banking system's influence on the macro-economy under varying a…
A lending scheme for a system of interconnected banks with probabilistic constraints of failureq-fin.MF
We derive a closed form solution for an optimal control problem related to an interbank lending schemes subject to terminal probability constraints on the failure of banks which are interconnected through a financial network. The derived solution applies to a real banks network by obtaining a general solution when the …
GenAI adoption paradoxically lowers ROE for U.S. banks, with spillovers but systemic risk concerns.
problem Productivity paradox and implementation costs in U.S. banking sector with AI adoption.
method Dynamic Spatial Durbin Models (DSDM) and Synthetic Difference-in-Differences (SDID) for causal inference.
result AI adoption leads to a 428-basis-point decline in ROE for banks, with spillovers but systemic risk implications.
Diversification increases systemic risk, contrary to belief.
problem Systemic risk due to diversification at banks.
method Examined diversification's impact on joint default probability and systemic risk using VaR.
result Diversification reduces individual and systemic risk, contrary to common belief.
We propose a new model of the liquidity driven banking system focusing on overnight interbank loans. This significant branch of the interbank market is commonly neglected in the banking system modeling and systemic risk analysis. We construct a model where banks are allowed to use both the interbank and the securities …
Model shows how financial contagion spreads through complex interdependencies.
problem Understanding how banks fail in an interconnected financial system.
method Unified model combining direct and indirect dependencies; three reconstruction methods.
result Hierarchical cascades reveal dominant banks in failures.
The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beale et al. ("Individual versus systemic risk and the regulator's dilemma", Proc Natl Acad Sci USA 108: 12647-12652, 2011) demonstrated that higher portfolio diversity among…
Modeling bank leverage dynamics to understand systemic risk in financial markets.
problem Understanding systemic risk in financial markets triggered by bank leverage dynamics.
method Developed a dynamical model of bank leverage, analyzing coupled dynamics in isolated and interconnected bank models.
result Identified a procyclical feedback loop between asset prices and leverage, leading to chaotic dynamics.
We consider a model of contagion in financial networks recently introduced in the literature, and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the effect of heterogeneous degree distributions, heterogeneous balance sheet size and…
This paper investigates two mechanisms of financial contagion that are, firstly, the correlated exposure of banks to the same source of risk, and secondly the direct exposure of banks in the interbank market. It will consider a random network of banks which are connected through the inter-bank market and will discuss t…
The interconnectedness of financial institutions affects instability and credit crises. To quantify systemic risk we introduce here the PD model, a dynamic model that combines credit risk techniques with a contagion mechanism on the network of exposures among banks. A potential loss distribution is obtained through a m…
Survey examines types of systemic risk in financial networks.
problem Understanding systemic risk in financial networks.
method Taxonomy of systemic risk types and regulatory measures.
result Different types of systemic risk identified.
We use bank-level balance sheet data from 2005 to 2010 to study interactions within the banking system of five emerging countries: Argentina, Brazil, Mexico, South Africa, and Taiwan. For each country we construct a financial network based on the leverage ratio dependence between each pair of banks, and find results th…
Study minimizes market inefficiency in systemic economies.
problem Minimizing deviations of market prices from fundamental values.
method Characterized market inefficiency and developed a matrix of holdings to minimize it.
result Portfolio holdings should deviate more from diversification if banks have similar systemic significance.
A scenario in which regulators take the drastic step of requiring coverage of all venture bank investment loans using interbank borrowed funds is considered. In this scenario, a minimal amount of default insurance is used, such that Tier 1 and 2 capital requirements are still met. To do this, the default insurance perc…
Swapping debt contracts can mitigate risk in financial networks.
problem Mitigating risk in financial networks through debt swaps.
method Analysis of debt swapping operations in financial networks under various conditions.
result Positive debt swaps can exist in worst-case shock models to minimize losses.
We propose a new methodology based on the Marshall-Olkin (MO) copula to model cross-border systemic risk. The proposed framework estimates the impact of the systematic and idiosyncratic components on systemic risk. Initially, we propose a maximum-likelihood method to estimate the parameter of the MO copula. In order to…
Gringotts Wizarding Bank is well known as the only financial institution in all of the Wizarding UK as documented in the works recounting the heroics of Harry Potter. The concentration of power and wealth in this single bank needs to be weighed against the financial stability of the entire Wizarding economy. This study…
New systemic risk models for banks choosing their group memberships.
problem Analyzing systemic risk for banks in disjoint and overlapping groups.
method Proposed new models with realistic game features, introducing Nash equilibrium for optimal solution.
result Explicit solution for risk allocation and existence/uniqueness of Nash equilibrium.
Commercial banks and other depository institutions in some countries are required to hold in reserve against deposits made by their customers at their Central Bank or Federal Reserve. Although some countries have been eliminated it, this requirement is useful as one of many Central Bank's regulation made to control rat…