Incentivizing Resilience in Financial Networks. Leduc, M., V. & Thurner, S. 2016. Website abstract bibtex When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information about the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We show that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings can exist and are generally inefficient. This allows the regulator to effectively `rewire' the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume.
@article{
title = {Incentivizing Resilience in Financial Networks},
type = {article},
year = {2016},
identifiers = {[object Object]},
pages = {32},
websites = {http://arxiv.org/abs/1606.03595},
id = {f0a9875a-de6d-344d-ba33-cd31c7fae1fd},
created = {2016-11-01T13:45:57.000Z},
file_attached = {false},
profile_id = {d1815a50-af3a-3b67-802a-834c45407e36},
group_id = {bd0f1172-1660-3fe3-b7d0-9f2d0b4051ad},
last_modified = {2017-03-14T12:29:36.496Z},
read = {false},
starred = {false},
authored = {false},
confirmed = {true},
hidden = {false},
citation_key = {Leduc2016a},
abstract = {When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information about the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We show that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings can exist and are generally inefficient. This allows the regulator to effectively `rewire' the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume.},
bibtype = {article},
author = {Leduc, Matt V. and Thurner, Stefan},
number = {March}
}
Downloads: 0
{"_id":"p46f4k2cLZoSuZbwC","bibbaseid":"leduc-thurner-incentivizingresilienceinfinancialnetworks-2016","downloads":0,"creationDate":"2016-11-22T10:32:19.101Z","title":"Incentivizing Resilience in Financial Networks","author_short":["Leduc, M., V.","Thurner, S."],"year":2016,"bibtype":"article","biburl":null,"bibdata":{"title":"Incentivizing Resilience in Financial Networks","type":"article","year":"2016","identifiers":"[object Object]","pages":"32","websites":"http://arxiv.org/abs/1606.03595","id":"f0a9875a-de6d-344d-ba33-cd31c7fae1fd","created":"2016-11-01T13:45:57.000Z","file_attached":false,"profile_id":"d1815a50-af3a-3b67-802a-834c45407e36","group_id":"bd0f1172-1660-3fe3-b7d0-9f2d0b4051ad","last_modified":"2017-03-14T12:29:36.496Z","read":false,"starred":false,"authored":false,"confirmed":"true","hidden":false,"citation_key":"Leduc2016a","abstract":"When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information about the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We show that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings can exist and are generally inefficient. This allows the regulator to effectively `rewire' the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume.","bibtype":"article","author":"Leduc, Matt V. and Thurner, Stefan","number":"March","bibtex":"@article{\n title = {Incentivizing Resilience in Financial Networks},\n type = {article},\n year = {2016},\n identifiers = {[object Object]},\n pages = {32},\n websites = {http://arxiv.org/abs/1606.03595},\n id = {f0a9875a-de6d-344d-ba33-cd31c7fae1fd},\n created = {2016-11-01T13:45:57.000Z},\n file_attached = {false},\n profile_id = {d1815a50-af3a-3b67-802a-834c45407e36},\n group_id = {bd0f1172-1660-3fe3-b7d0-9f2d0b4051ad},\n last_modified = {2017-03-14T12:29:36.496Z},\n read = {false},\n starred = {false},\n authored = {false},\n confirmed = {true},\n hidden = {false},\n citation_key = {Leduc2016a},\n abstract = {When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information about the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We show that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings can exist and are generally inefficient. This allows the regulator to effectively `rewire' the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume.},\n bibtype = {article},\n author = {Leduc, Matt V. and Thurner, Stefan},\n number = {March}\n}","author_short":["Leduc, M., V.","Thurner, S."],"urls":{"Website":"http://arxiv.org/abs/1606.03595"},"bibbaseid":"leduc-thurner-incentivizingresilienceinfinancialnetworks-2016","role":"author","downloads":0},"search_terms":["incentivizing","resilience","financial","networks","leduc","thurner"],"keywords":[],"authorIDs":[]}