Comments on: Is Network Theory the Best Hope for Regulating Systemic Risk? http://www.aleablog.com/is-network-theory-the-best-hope-for-regulating-systemic-risk/ Alea Jacta Est Mon, 12 Jul 2010 20:04:31 +0000 hourly 1 http://wordpress.org/?v=3.0 By: jck http://www.aleablog.com/is-network-theory-the-best-hope-for-regulating-systemic-risk/#comment-3504 jck Sun, 18 Oct 2009 20:17:19 +0000 http://www.aleablog.com/?p=4296#comment-3504 I hope you succeed in putting the papers online, this is most important research, and as I mentioned I asked the ECB but was turned down. As for "interbank market is dead", I mean it has become extremely short term, the contraction is indeed all in the longer unsecured loan market. Basically the "bad" banks structurally short funds get them from the central banks and the "good" banks structurally long funds lend them to the central banks, so there is a relative expansion of short term funding and of central bank intermediation to the detriment of the longer term unsecured interbank loan market, that's the one that's "dead", I should not have been clearer. The vast amount of liquidity provided by the central banks may be reinforcing that trend rather than reversing it. I hope you succeed in putting the papers online, this is most important research, and as I mentioned I asked the ECB but was turned down.
As for “interbank market is dead”, I mean it has become extremely short term, the contraction is indeed all in the longer unsecured loan market. Basically the “bad” banks structurally short funds get them from the central banks and the “good” banks structurally long funds lend them to the central banks, so there is a relative expansion of short term funding and of central bank intermediation to the detriment of the longer term unsecured interbank loan market, that’s the one that’s “dead”, I should not have been clearer. The vast amount of liquidity provided by the central banks may be reinforcing that trend rather than reversing it.

]]> By: Kimmo Soramaki http://www.aleablog.com/is-network-theory-the-best-hope-for-regulating-systemic-risk/#comment-3503 Kimmo Soramaki Sun, 18 Oct 2009 19:33:00 +0000 http://www.aleablog.com/?p=4296#comment-3503 Thanks for highlighting some of my work. I am indeed trying to collect the presentations of the ECB workshop on my blog. As for the "Interbank market is dead"... I've had difficulties understanding what is meant by this. We looked at the UK overnight loans and they have held their levels (although of course demand may have been higher giving the feeling of no liquidity). Also, maybe contraction took place in the longer term loans. See "The sterling unsecured loan market during 2006–2008: insights from network topology", http://www.bof.fi/NR/rdonlyres/DD0F35C8-9FAE-4066-AC01-6D4631A9D5D1/0/E42.pdf, page 287. Thanks for highlighting some of my work. I am indeed trying to collect the presentations of the ECB workshop on my blog. As for the “Interbank market is dead”… I’ve had difficulties understanding what is meant by this. We looked at the UK overnight loans and they have held their levels (although of course demand may have been higher giving the feeling of no liquidity). Also, maybe contraction took place in the longer term loans. See “The sterling unsecured loan market during 2006–2008: insights from network topology”, http://www.bof.fi/NR/rdonlyres/DD0F35C8-9FAE-4066-AC01-6D4631A9D5D1/0/E42.pdf, page 287.

]]> By: kg http://www.aleablog.com/is-network-theory-the-best-hope-for-regulating-systemic-risk/#comment-3498 kg Wed, 14 Oct 2009 03:06:04 +0000 http://www.aleablog.com/?p=4296#comment-3498 jck, "Interbank market is dead" I'm not questioning the underlying condition, but rather how you came across this information. I'm guessing you push big piles of money around? jck,

“Interbank market is dead”

I’m not questioning the underlying condition, but rather how you came across this information. I’m guessing you push big piles of money around?

]]> By: jck http://www.aleablog.com/is-network-theory-the-best-hope-for-regulating-systemic-risk/#comment-3497 jck Tue, 13 Oct 2009 17:21:40 +0000 http://www.aleablog.com/?p=4296#comment-3497 I think "they" (the major central banks) are working on it and it's good news. However it's all very secretive, the ECB has not put the papers presented at the recent workshop on their site, I asked, but they refused. I think one of the presenters will try to, we will see. But as you say, this is going to take a long time plus the system itself is always changing, for ex, the interbank market is dead for now and doesn't look like coming back. But maybe the regulators will see eventually that small changes can have huge effects like the misguided changes in the risk-weighting of undrawn credit lines which in my view destroyed the interbank market by reducing redundancy just when it was most needed. I think “they” (the major central banks) are working on it and it’s good news. However it’s all very secretive, the ECB has not put the papers presented at the recent workshop on their site, I asked, but they refused. I think one of the presenters will try to, we will see.
But as you say, this is going to take a long time plus the system itself is always changing, for ex, the interbank market is dead for now and doesn’t look like coming back. But maybe the regulators will see eventually that small changes can have huge effects like the misguided changes in the risk-weighting of undrawn credit lines which in my view destroyed the interbank market by reducing redundancy just when it was most needed.

]]> By: David Merkel http://www.aleablog.com/is-network-theory-the-best-hope-for-regulating-systemic-risk/#comment-3496 David Merkel Tue, 13 Oct 2009 17:03:25 +0000 http://www.aleablog.com/?p=4296#comment-3496 This is interesting stuff, and all that, but to use network theory to prevent financial crises, one would need much larger models than these, I would think. You would need network models for most major asset markets, and a meta-network complete with balance sheets for the actors involved, and then track the cash flows. You probably know more about this than me. To make this useful, there are years of work to go on modeling, and regulatory changes needed to collect the necessary data on a domestic basis. Then would come and international model? What do you think? This is interesting stuff, and all that, but to use network theory to prevent financial crises, one would need much larger models than these, I would think. You would need network models for most major asset markets, and a meta-network complete with balance sheets for the actors involved, and then track the cash flows.

You probably know more about this than me. To make this useful, there are years of work to go on modeling, and regulatory changes needed to collect the necessary data on a domestic basis. Then would come and international model?

What do you think?

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