Efficiency and Stability of a Financial Architecture with Too-Interconnected-to-Fail Institutions
41 mins 39 secs,
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| Description: |
Gofman, M (University of Wisconsin-Madison)
Thursday 28 August 2014, 14:30-15:00 |
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| Created: | 2014-08-29 12:18 |
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| Collection: | Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches |
| Publisher: | Isaac Newton Institute |
| Copyright: | Gofman, M |
| Language: | eng (English) |
| Distribution: |
World
(downloadable)
|
| Explicit content: | No |
| Aspect Ratio: | 16:9 |
| Screencast: | No |
| Bumper: | UCS Default |
| Trailer: | UCS Default |
| Abstract: | 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. |
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