Risk trading, network topology and banking regulation
AbstractIn the context of understanding the nature of the risk transformation process of the financial system we propose an iterative risk-trading game between several agents who build their trading strategies based on a general utility setting. The game is studied numerically for different network topologies. Consequences of topology are shown for the wealth time-series of agents, for the safety and efficiency of various types of network. The proposed set-up allows an analysis of the effects of different approaches to banking regulation as currently suggested by the Basle Committee of Banking Supervision. We find a phase-transition-like phenomenon, where the Basle parameter plays the role of temperature and system safety serves as the order parameter. This result suggests the existence of an optimal regulation parameter. As a consequence, a tightening of the current regulatory framework does not necessarily lead to an improvement of the safety of the banking system. Moreover, we show that banking systems with local risk-sharing cooperations have higher global default rates than systems with low cyclicality.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 3 (2003)
Issue (Month): 4 ()
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- Neuberger, Doris & Rissi, Roger, 2012.
"Macroprudential banking regulation: Does one size fit all?,"
Thuenen-Series of Applied Economic Theory
124, University of Rostock, Institute of Economics.
- Doris Neuberger & Roger Rissi, 2014. "Macroprudential Banking Regulation: Does One Size Fit All?," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(1), pages 5-28, May.
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- Neuberger, Doris & Rissi, Roger, 2012. "Macroprudential banking regulation: Does one size fit all?," Thuenen-Series of Applied Economic Theory 124, University of Rostock, Institute of Economics.
- Michael Boss & Martin Summer & Stefan Thurner, 2004. "Contagion Flow Through Banking Networks," Papers cond-mat/0403167, arXiv.org.
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