Financial interconnectedness gives rise to systemic risk via - - PowerPoint PPT Presentation

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Financial interconnectedness gives rise to systemic risk via - - PowerPoint PPT Presentation

Nov 06, 2022 140 likes β€’190 views

Financial interconnectedness gives rise to systemic risk via financial contagion 1 Recent policy to reduce interconnectedness: eliminate cycles = Portfolio Compression = ( , 1) B B 1 A A 2 1 3 2 C C 2

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1

Financial interconnectedness gives rise to systemic risk via financial contagion

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SLIDE 2

Recent policy to reduce interconnectedness: eliminate cycles = Portfolio Compression

2

A B C

3 1 2

𝑑 = (𝐡– 𝐢– 𝐷, 1)

A B C

2 1

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SLIDE 3

Research Question: Systemic effects

  • f portfolio compression

3

Research Questions: Given a specific compression:

  • 1. When socially beneficial?
  • 2. Banks’ incentives to agree

to it? Conventional wisdom:

  • 1. always, 2. always
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Portfolio Compression in Financial Networks: Incentives and Systemic Risk

Steffen Schuldenzucker1 and Sven Seuken2

1 Algorithms and Complexity Research Group, Goethe University Frankfurt 2 Computation and Economics Research Group, University of Zurich

Results:

  • Conventional wisdom is wrong

β†’ Non-trivial trade-off: loss sharing vs. contagion

  • Sufficient conditions: Pareto improvement (bank balance sheets, network

structure)

  • Sufficient conditions: Incentivized compression (network structure)