From the ECB:
In October 2009, the European Central Bank (ECB) hosted a workshop entitled “Recent advances in modelling systemic risk using network analysis”. Today, the ECB is publishing a summary of the workshop, which was attended by experts from central banks and international organisations working in the fields of financial stability and payment system analysis/oversight.
The global financial crisis clearly illustrated the role of financial linkages as a channel for the propagation of shocks to and within the financial system. Recent research in the area of financial network analysis has shown that modelling and simulating the interlinking exposures between financial institutions and sectors of the economy or across entire national financial systems can reveal vulnerabilities that would otherwise remain undetected. The aim of the workshop was to exchange views and experiences in the field of financial network analysis. The workshop also aimed to improve awareness of network modelling in general and to enhance knowledge of the possibilities and limitations of this area of analysis.
The workshop highlighted the potential of network theory to enhance the tools for macroprudential analysis, market infrastructure oversight and counterparty risk management and proposed several avenues for future research.
Recent advances in modelling systemic risk using network analysis
Related:
Is Network Theory the Best Hope for Regulating Systemic Risk?
Too Interconnected to Fail: Financial Network of CDS and Other Credit Enhancment Obligations of US Banks
Too Interconnected To Fail: Financial Contagion and Systemic Risk From Network Model of CDS and Other Credit Enhancement Obligations of US Banks — Slides
Okay, I will keep watching, but I have my doubts…
I think total system leverage is not a sufficient metric, I agree with you on the prediction issue, but my view is that a visual representation of the network, while not predicting anything, makes it easier to spot the potential trouble spots. Look at the last link (slides: Note the clustering between key banks and ‘outside’ non bank (triangle) around page 29), no prediction there but “outside entity” surely should be closely monitored by regulators.
This is early days, but some interesting potential…
jck, I find their models to be complex and hard to estimate. I was reading a journal on nonlinear dynamics, and there was an article on (something to the effect of) “If nonlinear models can’t predict, what good are they?” Complex models have a difficult time estimating parameters with any degree of certainty. I would imagine that is true for network models.
Personally, I think it would be simpler to just limit total system leverage. But maybe I dream.