Systemic importance of financial institutions: regulations, research, open issues, proposals

In the field of risk management, scholars began to bring together the quantitative methodologies with the banking management issues about 30 years ago, with a special focus on market, credit and operational risks. After the systemic effects of banks defaults during the recent financial crisis, and despite a huge amount of literature in the last years concerning the systemic risk, no standard methodologies have been set up to now. Even the new Basel 3 regulation has adopted a heuristic indicator-based approach, quite far from an effective quantitative tool. In this paper, we refer to the different pieces of the puzzle: definition of systemic risk, a set of coherent and useful measures, the computability of these measures, the data set structure. In this challenging field, we aim to build a comprehensive picture of the state of the art, to illustrate the open issues, and to outline some paths for a more successful future research. This work appropriately integrates other useful surveys and it is directed to both academic researchers and practitioners

Networks in Finance

Modem financial systems exhibit a high degree of interdependence, with connections between finanCial institutions stemming from both the asset and the liability sides of their balance sheets. Networks-broadly understood as a collection of nodes and links between nodes-ean be a useful representation offinanCial systems. By modeling eco nomic interactions, network analyses can better explain certain economic phenomena. In this chapter, Allen and Babus argue that the use of network theories can enrich our understanding of finanCial systems. They explore several critical issues. First, they address the issue ofsystemic risk, by studying two questions: how resilient finanCial net works are to contagion, and how financial institutions form connections when exposed to the risk ofcontagion. Second, they consider how network theory can be used to explain freezes in the interbank market. Third, they examine how social networks can improve investment decisions and corporate governance, based on recent empirical results. Fourth, they examine the role of networks in distributing primary issues of securities. Finally, they consider the role of networks as a form of mutuat monitoring, as in microfinance. 1 We are grateful to the editors and to participants at the Wharton INSEAD conference on November 8-9, 2007, where the book's papers were presented for their helpful comments