The multi-layer network nature of systemic risk and its implications for the costs of financial crises
By Sebastian Poledna, José Luis Molina-Borboa, Seraf'in Mart'inez-Jaramillo, Marco van der Leij, Stefan Thurner 4. 2015
285 citations recorded by the source corpus.
The inability to see and quantify systemic financial risk comes at an immense social cost. Systemic risk in the financial system arises to a large extent as a consequence of the interconnectedness of its institutions, which are linked through networks of different types of financial contracts, such as credit, derivatives, foreign exchange, and securities. The interplay of the various exposure networks can be represented as layers in a financial multi-layer network. In this work we quantify the daily contributions to systemic risk from four layers of the Mexican banking system from 2007 to 2013. We show that focusing on a single layer underestimates the total systemic risk by up to 90%. By assigning systemic risk levels to individual banks we study the systemic risk profile of the Mexican banking system on all market layers. This profile can be used to quantify systemic risk on a national level in terms of nation-wide expected systemic losses. We show that market-based systemic risk indicators systematically underestimate expected systemic losses. We find that expected systemic losses are up to a factor of four higher now than before the financial crisis of 2007–2008. We find that systemic risk contributions of individual transactions can be up to a factor of one thousand higher than the corresponding credit risk, which creates huge risks for the public. We find an intriguing non-linear effect whereby the sum of systemic risk of all layers underestimates the total risk. The method presented here is the first objective data-driven quantification of systemic risk on national scales that reveal its true levels.
Subfields: Finance
View Paper: https://www.semanticscholar.org/paper/c2ec11bdc89c107858fd61e1912828083090801a
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Citations in the corpus
- Systemic Risk and Bank Size (2018, unknown): “…has attracted a lot of interest in recent years and has led to the development of models of interbank lending and contagion through networks (Poledna et al., 2015; Kanno, 2015; Hautsch et al., 2015; Betz et al., 2016).1 Danielsson et al. (2016) question the reliability of current systemic…”
- Multiplex Interbank Networks and Systemic Importance: An Application to European Data (2016, unknown): “An exception is the recent contribution by Poledna et al. (2015), which uses the algorithm developed in Battiston et al. (2012) to study the multiplex Mexican interbank system.”
- Quantification of systemic risk from overlapping portfolios in the financial system (2018, methodology): “Using the methodology developed in Poledna et al. (2015), we estimate SR at the country level.”
- Elimination of systemic risk in financial networks by means of a systemic risk transaction tax (2014, background): “Central banks would have to record transactions in real time; this is done as a matter of course for several financial markets routinely, for instance, at the Banco de México (Solorzano-Margain et al. 2013, Poledna et al. 2015).”