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Stefano Battiston: "Too complex to fail"

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A presentation held by professor Stefano Battiston, Zurich University, at the high level seminar "Towards a sustainable financial system" hosted by the Stockholm based think tank Global Challenge in cooperation with the London School of Economics and the Swedish House of Finance on the 12-13 September 2013.

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Stefano Battiston: "Too complex to fail"

  1. 1. ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration and Complexity in Financial Networks Stefano Battiston Towards a Sustainable Financial System, Stockholm September 12, 2013
  2. 2. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Acknowledgments Acknowledgments SNF-Professorship on Financial Networks and Systemic risk Institute of Banking and Finance, UZH (from Fall 2013) FOC: Forecasting Financial Crises - EU Project FET-OPEN (2010-2013). Coord. G. Caldarelli (IMT Lucca), 14 partners, including ECB SIMPOL: Financial Systems Simulation and Policy Modeling - EU Project FET-OPEN (2013-2015) Coord. S. Battiston - Financial networks modeling, Crowd-sourcing: engaging people in mapping influence INET (Inst. of New Econ. Thinking) - Finan. Stability Program, coord. J. Stiglitz (Columbia Univ.). Activity on Financial Networks, chaired A. Haldane (BoE) Towards a Sustainable Financial System, Stockholm September 12, 2013 2 / 17
  3. 3. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Outline Outline of the talk Towards a sustainable financial system: key dimensions Interdependence Complexity Concentration Notion of economic value. 200 400 600 800 1000 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Time (days) DebtRank Towards a Sustainable Financial System, Stockholm September 12, 2013 3 / 17
  4. 4. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Interdependence Towards a Sustainable Financial System, Stockholm September 12, 2013 4 / 17
  5. 5. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Interdependence Towards a Sustainable Financial System, Stockholm September 12, 2013 4 / 17
  6. 6. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Interdependence Towards a Sustainable Financial System, Stockholm September 12, 2013 4 / 17
  7. 7. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Interdependence Towards a Sustainable Financial System, Stockholm September 12, 2013 4 / 17
  8. 8. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Balance Sheet Interlock and Distress Propagation Towards a Sustainable Financial System, Stockholm September 12, 2013 5 / 17
  9. 9. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Balance Sheet Interlock and Distress Propagation Towards a Sustainable Financial System, Stockholm September 12, 2013 5 / 17
  10. 10. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Balance Sheet Interlock and Distress Propagation Towards a Sustainable Financial System, Stockholm September 12, 2013 5 / 17
  11. 11. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Interdependence Comovements among CDS Nodes: institutions with traded CDS Links: significant co-movements between spreads. Towards a Sustainable Financial System, Stockholm September 12, 2013 6 / 17
  12. 12. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Complexity Complexity Complex Instruments, e.g. derivatives Complex network of contracts Towards a Sustainable Financial System, Stockholm September 12, 2013 7 / 17
  13. 13. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Complexity Complexity Probability of default are interdependent: determination of equilibrium can be not easy Towards a Sustainable Financial System, Stockholm September 12, 2013 8 / 17
  14. 14. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Complexity Complexity Probability of default are interdependent: determination of equilibrium can be not easy Towards a Sustainable Financial System, Stockholm September 12, 2013 8 / 17
  15. 15. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Concentration Concentration: how many relevant market players in the game. 1 Risk is more concentrated. Fewer egg baskets. 2 Higher chances of market power. High concentration and strong interdependence together: 1 Higher systemic risk (a single big player can affect other big ones) 2 Higher risk of regulatory capture (big players share economic interests, no collusion) Towards a Sustainable Financial System, Stockholm September 12, 2013 9 / 17
  16. 16. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration The Corporate Network Equity ownership ties: influence and information 40 thousand TNC, 1 million actors 1% of the actors: 80% of influence 100 financial firms: 40% of influence. Stock Debt Employees Manage− ment Board of Directors Corporation BanksStockholders Investors elect elect cash−flow rights Treasury shares Outstanding shares (Preferred shares) Loans Bonds cash−flow rights voting rights Towards a Sustainable Financial System, Stockholm September 12, 2013 10 / 17
  17. 17. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration The Corporate Network Equity ownership ties: influence and information 40 thousand TNC, 1 million actors 1% of the actors: 80% of influence 100 financial firms: 40% of influence. Towards a Sustainable Financial System, Stockholm September 12, 2013 10 / 17
  18. 18. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration The Corporate Network Equity ownership ties: influence and information 40 thousand TNC, 1 million actors 1% of the actors: 80% of influence 100 financial firms: 40% of influence. Towards a Sustainable Financial System, Stockholm September 12, 2013 10 / 17
  19. 19. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration The Corporate Network Equity ownership ties: influence and information 40 thousand TNC, 1 million actors 1% of the actors: 80% of influence 100 financial firms: 40% of influence. Towards a Sustainable Financial System, Stockholm September 12, 2013 10 / 17
  20. 20. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Towards a Sustainable Financial System, Stockholm September 12, 2013 11 / 17
  21. 21. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Towards a Sustainable Financial System, Stockholm September 12, 2013 11 / 17
  22. 22. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Towards a Sustainable Financial System, Stockholm September 12, 2013 11 / 17
  23. 23. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Towards a Sustainable Financial System, Stockholm September 12, 2013 11 / 17
  24. 24. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Towards a Sustainable Financial System, Stockholm September 12, 2013 11 / 17
  25. 25. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Towards a Sustainable Financial System, Stockholm September 12, 2013 11 / 17
  26. 26. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration 2 3 4 5 6 7 8 9 10 0 0.05 0.1 0.15 0.2 0.25 DEXIA UBS CREDIT SUISSE DEUTSCHE BANK COMMERZBANK BNPSOCGEN NATIXIS BARCLAYS RBS HBOS UNICREDITO MITSUBISHI UFJ FORTIS CITIGROUP BOA JPM WELLS FARGO WACHOVIA GSACHS MERRILL LYNCH MORGAN STANLEY Relative asset size (%) DebtRank 10 b Debt 90 b Fragility 3 6 9 Towards a Sustainable Financial System, Stockholm September 12, 2013 12 / 17
  27. 27. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration 2 3 4 5 6 7 8 9 10 0 0.05 0.1 0.15 0.2 0.25 0.3 DEXIA UBS CREDIT SUISSE DEUTSCHE BANK COMMERZBANK BNPSOCGEN NATIXIS BARCLAYSRBS HBOS UNICREDITO MITSUBISHI UFJ FORTIS CITIGROUP BOA JPM WELLS FARGO WACHOVIA GSACHS MERRILL LYNCH MORGAN STANLEY Relative asset size (%) DebtRank 10 b Debt 90 b Fragility 3 6 9 Towards a Sustainable Financial System, Stockholm September 12, 2013 12 / 17
  28. 28. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration 2 3 4 5 6 7 8 9 10 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 DEXIA UBS CREDIT SUISSE DEUTSCHE BANK COMMERZBANK BNP SOCGEN NATIXIS BARCLAYS RBS HBOS UNICREDITO MITSUBISHI UFJ FORTIS CITIGROUP BOA JPM WELLS FARGO WACHOVIA GSACHS MERRILL LYNCH MORGAN STANLEY Relative asset size (%) DebtRank 10 b Debt 90 b Fragility 3 6 9 Towards a Sustainable Financial System, Stockholm September 12, 2013 12 / 17
  29. 29. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration 2 3 4 5 6 7 8 9 10 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 DEXIA UBS CREDIT SUISSE DEUTSCHE BANK COMMERZBANK BNP SOCGEN NATIXIS BARCLAYSRBS HBOS UNICREDITO MITSUBISHI UFJ FORTIS CITIGROUPBOA JPM WELLS FARGO WACHOVIA GSACHS MERRILL LYNCH MORGAN STANLEY Relative asset size (%) DebtRank 10 b Debt 90 b Fragility 3 6 9 Towards a Sustainable Financial System, Stockholm September 12, 2013 12 / 17
  30. 30. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration 2 3 4 5 6 7 8 9 10 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 DEXIA UBS CREDIT SUISSE DEUTSCHE BANK COMMERZBANK BNP SOCGEN NATIXIS BARCLAYSRBS HBOS UNICREDITO MITSUBISHI UFJ FORTIS CITIGROUP BOA JPM WELLS FARGO WACHOVIA GSACHSMERRILL LYNCH MORGAN STANLEY Relative asset size (%) DebtRank 10 b Debt 90 b Fragility 3 6 9 Towards a Sustainable Financial System, Stockholm September 12, 2013 12 / 17
  31. 31. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration 2 3 4 5 6 7 8 9 10 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 DEXIA UBS CREDIT SUISSE DEUTSCHE BANK COMMERZBANK BNPSOCGEN NATIXIS BARCLAYS RBS HBOS UNICREDITO MITSUBISHI UFJ FORTIS CITIGROUP BOA JPM WELLS FARGO WACHOVIA GSACHSMERRILL LYNCH MORGAN STANLEY Relative asset size (%) DebtRank 10 b Debt 90 b Fragility 3 6 9 Towards a Sustainable Financial System, Stockholm September 12, 2013 12 / 17
  32. 32. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Interplay When interdependence, complexity and concentration are so high: AS IF we had one international mega-bank, or not? Towards a Sustainable Financial System, Stockholm September 12, 2013 13 / 17
  33. 33. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Interplay When interdependence, complexity and concentration are so high: AS IF we had one international mega-bank, or not? Risks Regulatory capture Systemic distress Social divide Towards a Sustainable Financial System, Stockholm September 12, 2013 13 / 17
  34. 34. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration The Notion of Economic Value Economic value: a social norm. Towards a Sustainable Financial System, Stockholm September 12, 2013 14 / 17
  35. 35. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration The Notion of Economic Value Economic value: a social norm. Investment decisions: where is drive to sustainability? Towards a Sustainable Financial System, Stockholm September 12, 2013 14 / 17
  36. 36. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Conclusions Scientific work on financial networks and systemic risk: problems may have deeper roots than we tend to think. Seems good to reduce concentration, interdependence and complexity, together. Proposals to reform bank organization could be examined in this light. At the same time: a serious effort to extending the notion of economic value. Towards a Sustainable Financial System, Stockholm September 12, 2013 15 / 17
  37. 37. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration Related International Activities SIMPOL (Financial Systems Simulation and Policy Modeling) FOC (Forecasting Financial Crises) GSS (Global Systems Science) GSDP Global Systems and Policies INET - Systemic Risk Task Force: WG Fin. Nets MULTIPLEX (Theory of networks of networks) Towards a Sustainable Financial System, Stockholm September 12, 2013 16 / 17
  38. 38. Stefano Battiston ETH Zurich www.sg.ethz.ch Too Complex to Fail Concentration References Debtrank: [Battiston, Puliga, Kaushik, Tasca, Caldarelli, DebtRank: Too-central-to-fail? (2012) Sci. Rep. 2:541] Complex derivatives [ Battiston, Caldarelli, Georg, May, Stiglitz, Nat. Phys., 2013] CDS and network reconstruction [Kaushik R., Battiston S., 2013 PLoS-ONE, forth], [Puliga M., Kaushik R., Battiston S., Caldarelli G., 2013 in progress] Estimation of systemic risk in networks from partial information: [Musmeci, Puliga, Gabrielli, Battiston, Caldarelli, JOSS 2013, forth.] Controllability in e-mid [Delpini, Battiston, Riccaboni, Pammolli, Gabbi, Caldarelli, Sci. Rep., 2013, forth.] Controllability in TARGET2 [Galbiati, Delpini, Battiston, (2013) Nat Phys] Towards a Sustainable Financial System, Stockholm September 12, 2013 17 / 17

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