Elimination of systemic risk in financial networks by means of a systemic risk transaction tax

By Sebastian Poledna, Stefan Thurner 4. 2014

117 citations recorded by the source corpus.

Financial markets are exposed to systemic risk (SR), the risk that a major fraction of the system ceases to function, and collapses. It has recently become possible to quantify SR in terms of underlying financial networks where nodes represent financial institutions, and links capture the size and maturity of assets (loans), liabilities and other obligations, such as derivatives. We demonstrate that it is possible to quantify the share of SR that individual liabilities within a financial network contribute to the overall SR. We use empirical data of nationwide interbank liabilities to show that the marginal contribution to overall SR of liabilities for a given size varies by a factor of a thousand. We propose a tax on individual transactions that is proportional to their marginal contribution to overall SR. If a transaction does not increase SR, it is tax-free. With an agent-based model (ABM) (CRISIS macro-financial model), we demonstrate that the proposed ‘Systemic Risk Tax’ (SRT) leads to a self-organized restructuring of financial networks that are practically free of SR. The SRT can be seen as an insurance for the public against costs arising from cascading failure. ABM predictions are shown to be in remarkable agreement with the empirical data and can be used to understand the relation of credit risk and SR.

Subfields: Economics and Econometrics, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/0a4766c2e812bd1fc98eb11eba8017f27fbb379e

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Citations in the corpus

The multi-layer network nature of systemic risk and its implications for the costs of financial crises (2015, methodology): “The precise meaning of the DebtRank as the fraction of the total economic value in a network allows us to define the expected systemic loss for the entire economy, which is the size of the loss, multiplied by the probability of that loss occurring [30].”
Systemic risk-efficient asset allocations: Minimization of systemic risk as a network optimization problem (2018, background): “(2012c); Thurner and Poledna (2013) and transaction-based (Poledna and Thurner, 2016).”
Quantification of systemic risk from overlapping portfolios in the financial system (2018, methodology): “Third, we compare the marginal contributions of individual direct and indirect exposures to the overall SR. Building on the work of Poledna and Thurner (2016) and Poledna et al. (2015), we define a novel risk measure to quantify the expected loss due to SR that takes cascading into account by…”
Climate risk and financial stability in the network of banks and investment funds (2020, unknown): “org/statistics/monthly/#electricity (7)(Barucca et al., 2016; Allen and Gale, 2001; Gai and Kapadia, 2010; Roukny et al., 2013; Di Iasio et al., 2013; Tabak et al., 2013; Thurner and Poledna, 2013; Poledna and Thurner, 2016; Fink et al., 2016; Puliga et al., 2014; Bardoscia et al., 2015, 2017; Ronco”