This document discusses systemic risk in interconnected financial systems. It presents a model for determining a "clearing payment vector" that clears the obligations of members in a financial system given their liabilities, limited liabilities, and operating cash flows. The paper shows there always exists a unique clearing vector and develops an algorithm to efficiently compute it. Comparative statics imply increased volatility lowers the total value of firms in the system even without direct costs of insolvency.
This paper presents two models of key determinants in the evolution of the shadow banking system. First of all, a shadow banking measure is built from a European perspective. Secondly, information on several variables is retrieved basing their selection in previous literature. Thirdly, those variables are grouped in: 1) the base model: real GDP, Institutional investors’ assets, term-spread, banks’ net interest margin and liquidity; and 2) the extended model: the former five plus an indicator of systemic stress, an index of banking concentration and inflation. Finally, regression analysis on those models is conducted for different countries’ samples. Both OLS and panel data analysis is undergone. Results suggest important and consistent geographical differences in relations between shadow banking and key determinant variables’ effects. Thus, this essay provides financial authorities with a valuable benchmark to which they should pay attention before designing optimal policies seeking to reduce the financial risk that shadow banking entails.
My Master's Thesis with the title "The Elephant in the Regulator's Room: Estimating the Size of the Global Shadow Banking System" compares different approaches to measuring the true size of shadow banking, for which crucial data is still missing. In addition to official statistics, I propose two further methods of empirically estimating assets in this amorphous system following a recent paper. The findings suggest that the system is larger than assumed and accumulated $96 trillion in 2015.
7.[52 64]the determinants of banks’ capital ratio in developing countriesAlexander Decker
This document analyzes the determinants of banks' capital ratios in Tunisia based on data from 18 Tunisian banks from 2002 to 2008. It finds that interest margin, risk, deposit variability, and intermediation rate positively impact capital ratios, while equity cost and deposits ratio have a negative effect. The main determinants of capital ratios are the same in Tunisia as in other countries, though Tunisian banks are smaller and more concentrated than banks in developed nations.
11.the determinants of banks’ capital ratio in developing countriesAlexander Decker
This document analyzes the determinants of banks' capital ratios in Tunisia using data from 18 commercial banks from 2002 to 2008. It finds that interest margin and risk have a strong positive impact on capital ratios, explaining the excess capital held by Tunisian banks beyond regulatory requirements. Deposit variability and intermediation rate also positively impact capital ratios, while equity cost and deposits ratio have a negative effect. The main determinants of capital ratios are found to be the same in Tunisia as in other countries, challenging the view that factors only affect capital ratios differently in emerging versus developed markets.
This document summarizes the results of a seminar held by the ESCB Macro-prudential Research Network (MaRs) at the OECD in Paris on September 11, 2014. MaRs was established in 2010 to develop conceptual frameworks, models and tools to support macro-prudential supervision in the EU. It has three work streams related to macro-financial models, early warning systems, and assessing contagion risks. The seminar highlighted research from each work stream, including models linking financial stability and economic performance, methods for early warning systems and systemic risk indicators, and analysis of contagion mechanisms and tools for assessing contagion risks.
This document is the manual for version 1.8 of the SimPy simulation library. It provides an introduction and overview of key concepts in SimPy including processes, how time elapses in a process, starting and stopping processes, asynchronous interruptions, signaling events, and defining and using resource objects. It also includes information on the SimPy website and supported Python version.
Digital Document Preservation Simulation - Boston Python User's GroupMicah Altman
Mr. Rick Landau, Research Affiliate, will present a briefing at the Boston Python Users Group meeting on the topic of simulating document loss .
Durable access to information requires insuring against multiple risks such as media failures, format obsolescence, fires, floods, earthquakes,
institutional failures, mergers, funding cuts, and malicious insiders. Real libraries need empirical guidance on storage strategies and costs -- and vendor claims of reliability are often uninformative, or suspect. The talk describes how event-based simulations, coded in python, are used to simulate document loss under a variety of risks profiles, and to provide practical guidance.
This meeting will be held at the Microsoft NERD building, 1 Memorial Drive, and is open to the public. More information is available through the meeting web page:
This document discusses systemic risk in interconnected financial systems. It presents a model for determining a "clearing payment vector" that clears the obligations of members in a financial system given their liabilities, limited liabilities, and operating cash flows. The paper shows there always exists a unique clearing vector and develops an algorithm to efficiently compute it. Comparative statics imply increased volatility lowers the total value of firms in the system even without direct costs of insolvency.
This paper presents two models of key determinants in the evolution of the shadow banking system. First of all, a shadow banking measure is built from a European perspective. Secondly, information on several variables is retrieved basing their selection in previous literature. Thirdly, those variables are grouped in: 1) the base model: real GDP, Institutional investors’ assets, term-spread, banks’ net interest margin and liquidity; and 2) the extended model: the former five plus an indicator of systemic stress, an index of banking concentration and inflation. Finally, regression analysis on those models is conducted for different countries’ samples. Both OLS and panel data analysis is undergone. Results suggest important and consistent geographical differences in relations between shadow banking and key determinant variables’ effects. Thus, this essay provides financial authorities with a valuable benchmark to which they should pay attention before designing optimal policies seeking to reduce the financial risk that shadow banking entails.
My Master's Thesis with the title "The Elephant in the Regulator's Room: Estimating the Size of the Global Shadow Banking System" compares different approaches to measuring the true size of shadow banking, for which crucial data is still missing. In addition to official statistics, I propose two further methods of empirically estimating assets in this amorphous system following a recent paper. The findings suggest that the system is larger than assumed and accumulated $96 trillion in 2015.
7.[52 64]the determinants of banks’ capital ratio in developing countriesAlexander Decker
This document analyzes the determinants of banks' capital ratios in Tunisia based on data from 18 Tunisian banks from 2002 to 2008. It finds that interest margin, risk, deposit variability, and intermediation rate positively impact capital ratios, while equity cost and deposits ratio have a negative effect. The main determinants of capital ratios are the same in Tunisia as in other countries, though Tunisian banks are smaller and more concentrated than banks in developed nations.
11.the determinants of banks’ capital ratio in developing countriesAlexander Decker
This document analyzes the determinants of banks' capital ratios in Tunisia using data from 18 commercial banks from 2002 to 2008. It finds that interest margin and risk have a strong positive impact on capital ratios, explaining the excess capital held by Tunisian banks beyond regulatory requirements. Deposit variability and intermediation rate also positively impact capital ratios, while equity cost and deposits ratio have a negative effect. The main determinants of capital ratios are found to be the same in Tunisia as in other countries, challenging the view that factors only affect capital ratios differently in emerging versus developed markets.
This document summarizes the results of a seminar held by the ESCB Macro-prudential Research Network (MaRs) at the OECD in Paris on September 11, 2014. MaRs was established in 2010 to develop conceptual frameworks, models and tools to support macro-prudential supervision in the EU. It has three work streams related to macro-financial models, early warning systems, and assessing contagion risks. The seminar highlighted research from each work stream, including models linking financial stability and economic performance, methods for early warning systems and systemic risk indicators, and analysis of contagion mechanisms and tools for assessing contagion risks.
This document is the manual for version 1.8 of the SimPy simulation library. It provides an introduction and overview of key concepts in SimPy including processes, how time elapses in a process, starting and stopping processes, asynchronous interruptions, signaling events, and defining and using resource objects. It also includes information on the SimPy website and supported Python version.
Digital Document Preservation Simulation - Boston Python User's GroupMicah Altman
Mr. Rick Landau, Research Affiliate, will present a briefing at the Boston Python Users Group meeting on the topic of simulating document loss .
Durable access to information requires insuring against multiple risks such as media failures, format obsolescence, fires, floods, earthquakes,
institutional failures, mergers, funding cuts, and malicious insiders. Real libraries need empirical guidance on storage strategies and costs -- and vendor claims of reliability are often uninformative, or suspect. The talk describes how event-based simulations, coded in python, are used to simulate document loss under a variety of risks profiles, and to provide practical guidance.
This meeting will be held at the Microsoft NERD building, 1 Memorial Drive, and is open to the public. More information is available through the meeting web page:
Contagion, Cascades and Disruptions to the Interbank Payment SystemKimmo Soramaki
1) The document discusses a conference on understanding systemic risk in financial systems, focusing on disruptions to interbank payment systems.
2) It presents research analyzing the network topology of the Fedwire payment system and building models to evaluate how payment systems respond to liquidity shocks and the potential for cascading failures.
3) The research finds that payment system participants have learned to coordinate activities after disruption and liquidity limits can lead to congestion, but behavior also influences resilience.
Is network theory the best hope for regulating systemic risk?Kimmo Soramaki
The presentation is organised around three policy questions:
1. How can we measure the systemic importance of a bank?
2. Can regulators promote a safer financial system by affecting its topology?
3. Is it possible to devise early-warning indicators from real-time data?
An agent based model of payment systems - Talk at Norges Bank 24 March 2011Kimmo Soramaki
The paper builds an agent based model where banks choose the amount of liquidity to settle a given flow of payments. The paper pays special attention to a realistic settlement process with complex dynamics and studies the equilibrium level of liquidity that is a result of the game between the banks. The paper investigates liquidity usage with various system sizes and volumes, and under different liquidity cost parameters.
Spontaneous Congestion Process in Inter-bank Payment SystemWaqas Tariq
With the highly development of information technology, the more efficient inter-bank payment system is required by modern financial system. This paper analyzes the spontaneous process of congestion in inter-bank payment system through creating multi-agents model between banks and customers. The simulation result indicates that the systemic liquidity congestion of inter-bank payment system is affected seriously by the demand of inter-bank payment. We find that the scale of bank system plays an important role on relieving the systemic payment pressure. On the other hand, the scale of bank system has a positive relationship with the probability of payment crisis occurrence, because the larger scale of the bank, the more pressure it takes in payment system.
Spontaneous Congestion Process in Inter-bank Payment SystemWaqas Tariq
With the highly development of information technology, the more efficient inter-bank payment system is required by modern financial system. This paper analyzes the spontaneous process of congestion in inter-bank payment system through creating multi-agents model between banks and customers. The simulation result indicates that the systemic liquidity congestion of inter-bank payment system is affected seriously by the demand of inter-bank payment. We find that the scale of bank system plays an important role on relieving the systemic payment pressure. On the other hand, the scale of bank system has a positive relationship with the probability of payment crisis occurrence, because the larger scale of the bank, the more pressure it takes in payment system.
Tools for Forecasting Financial Crisis @ ETHKimmo Soramaki
Presentation at the topical session "Forecasting Financial Crisis" at ETH workshop on "Coping with Crises in Complex Socio-Economic Systems" on 23 June 2011.
Financial Network Analysis - Seminar at IBM Watson Labs 7 April 2011Kimmo Soramaki
This document discusses the growing interest in using network analysis to study financial systems and systemic risk. It provides examples of how network analysis has been applied to study payment flows and overnight lending networks. The document argues that we need better models that incorporate the topology of interactions between financial entities as well as their dynamics and economic behavior. It introduces Financial Network Analysis as an open source tool being developed to provide network analysis capabilities for studying financial data and building agent-based models of systemic risk.
Practical implementation of the BCBS Monitoring indicators for intraday liqui...Kimmo Soramaki
(1) The document discusses calculating the BCBS monitoring indicators for intraday liquidity management using data from interbank payment systems. (2) It argues that payment system operators like central banks are best placed to calculate most of the indicators efficiently using their existing payment data. (3) Combining the indicators with network and flow data from payment systems allows for more meaningful stress testing and identification of systemically important banks.
Financial Network Analyzer - Workshop at West Point Military Academy on 8 Apr...Kimmo Soramaki
This document discusses the growing interest in analyzing financial networks and systemic risk. It notes that network theory provides a useful framework for understanding how risks can spread throughout an interconnected financial system. The document outlines how network analysis tools like the Financial Network Analyzer can be used to map payment flows and lending networks, model how risks might propagate through a financial system based on its structure and dynamics, and help regulators evaluate systemic importance of institutions. It argues that incorporating network topology, system dynamics models of how institutions interact, and economic behavior will be important for developing better models of systemic risk.
COMPLEMENTARY CURRENCY AND ITS IMPACT ON THE ECONOMYIFLab
This document analyzes the potential impact of complementary currencies on a national economy. It begins by discussing how money is created in traditional capitalist economies through a two-stage process of central banks issuing debt and commercial banks providing loans. It then presents a system dynamics model to describe money issuance in economies with and without "inside money". As an example, it analyzes outcomes of a barter network in El Salvador and calculates spending multipliers. The main finding is that digital community currencies have greater spending multipliers than regular money markets. While the analyzed network is currently small, it could help cushion macroeconomic shocks by stabilizing aggregate demand.
Study of the Simulation and Optimization System of Interbank SettlementsSSA KPI
1. The document describes a computer simulation and optimization system for modeling interbank settlement flows and costs.
2. The system is based on a Poisson-lognormal model of settlement flows and performs iterative simulation and optimization of expected transaction costs using randomly generated samples of transaction flows.
3. The results presented are from applying the system to data from the Bank of Lithuania's payment and settlement system, with the goal of exploring different settlement management strategies to minimize costs.
Financial Cartography for Payments and MarketsKimmo Soramaki
This document summarizes a seminar given by Dr. Kimmo Soramäki on identifying systemically important banks in payment systems and signals in market data. It discusses using the SinkRank algorithm to model liquidity flows in payment networks and identify banks that absorb liquidity from the system. It also discusses using correlation networks and minimum spanning trees to visualize correlations between financial assets and identify outliers. The seminar demonstrated FNA's software platform and HeavyTails service for automating such financial network analysis.
This document introduces a new approach to measuring systemic risk through quantifying the complexity and resilience of interconnected systems. It defines a method to construct "business structure maps" from financial data to model a system's structure and interdependencies. A system's complexity is calculated from its structure and entropy, and resilience is defined as its current complexity relative to minimum and maximum bounds. Case studies apply this method to systems of major European and US banks, identifying which banks most impact the overall system complexity and resilience. The approach aims to measure resilience without building explicit system models, reducing risk from model uncertainties.
This document summarizes Dr. Kimmo Soramäki's invited talk on applying network theory to interbank markets. The talk discusses (1) how network theory can provide insights into systemic risk by mapping interlinkages between financial institutions, (2) empirical analysis of interbank payment networks that show their scale-free structure, and (3) new network-based models and metrics for analyzing contagion risk and identifying systematically important institutions. The talk prioritizes further research in measuring interconnectedness, modeling contagion processes, developing systemic risk metrics, and network visualization techniques.
Financial Network Analysis - Talk at Oslo University 25 March 2011Kimmo Soramaki
Kimmo will introduce research in financial network analysis. He will talk about recent research on networks across various disciplines and discuss how network analysis can be used to gain a better understanding of the financial system and enhance its stability. He will also present a new open source tool ( www.financialnetworkanalyzer.com ) that can help policymakers and researchers in the area.
Implementing cross border payment, clearing and settlement systemsAlexander Decker
This document summarizes the experience of implementing cross-border payment, clearing, and settlement systems in the Southern African Development Community (SADC). Key points include:
1) Central banks in the SADC region are cooperating to define and implement a cross-border payment strategy as outlined in SADC protocols, to facilitate economic activity in the region.
2) The implementation process in SADC provides lessons for other regional blocks undergoing integration. Success factors and challenges from SADC's experience are discussed.
3) Four strategic objectives of the SADC cross-border payment strategy are outlined: enhancing legal/regulatory frameworks; implementing regional settlement infrastructure; integrating regional payment gateways; and establishing a regional payments council.
Financial Networks and Financial StabilityKimmo Soramaki
The recent global financial crisis has illustrated the role of financial linkages as a channel for the propagation of shocks. It also brought to the fore the concept that institutions may be “too interconnected to fail”, in addition to the traditional concept of being “too big to fail”.
Presented at the annual Financial Risk and Network Theory conference in Cambridge, I discuss recent work by FNA on addressing various financial risks with the help of network analysis.
Applications of Network Theory in Finance and ProductionKimmo Soramaki
This document summarizes Kimmo Soramäki's presentation on applications of network theory in finance and production. The presentation discusses: 1) Using network analysis of the Fedwire payment system to identify influential banks after the 2008 financial crisis. 2) The launch of a new journal on network theory in finance with an editorial board including experts from the Bank of England and ECB. 3) Upcoming conferences in September 2015 on network theory applications in finance.
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Contagion, Cascades and Disruptions to the Interbank Payment SystemKimmo Soramaki
1) The document discusses a conference on understanding systemic risk in financial systems, focusing on disruptions to interbank payment systems.
2) It presents research analyzing the network topology of the Fedwire payment system and building models to evaluate how payment systems respond to liquidity shocks and the potential for cascading failures.
3) The research finds that payment system participants have learned to coordinate activities after disruption and liquidity limits can lead to congestion, but behavior also influences resilience.
Is network theory the best hope for regulating systemic risk?Kimmo Soramaki
The presentation is organised around three policy questions:
1. How can we measure the systemic importance of a bank?
2. Can regulators promote a safer financial system by affecting its topology?
3. Is it possible to devise early-warning indicators from real-time data?
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The paper builds an agent based model where banks choose the amount of liquidity to settle a given flow of payments. The paper pays special attention to a realistic settlement process with complex dynamics and studies the equilibrium level of liquidity that is a result of the game between the banks. The paper investigates liquidity usage with various system sizes and volumes, and under different liquidity cost parameters.
Spontaneous Congestion Process in Inter-bank Payment SystemWaqas Tariq
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Spontaneous Congestion Process in Inter-bank Payment SystemWaqas Tariq
With the highly development of information technology, the more efficient inter-bank payment system is required by modern financial system. This paper analyzes the spontaneous process of congestion in inter-bank payment system through creating multi-agents model between banks and customers. The simulation result indicates that the systemic liquidity congestion of inter-bank payment system is affected seriously by the demand of inter-bank payment. We find that the scale of bank system plays an important role on relieving the systemic payment pressure. On the other hand, the scale of bank system has a positive relationship with the probability of payment crisis occurrence, because the larger scale of the bank, the more pressure it takes in payment system.
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This document discusses the growing interest in using network analysis to study financial systems and systemic risk. It provides examples of how network analysis has been applied to study payment flows and overnight lending networks. The document argues that we need better models that incorporate the topology of interactions between financial entities as well as their dynamics and economic behavior. It introduces Financial Network Analysis as an open source tool being developed to provide network analysis capabilities for studying financial data and building agent-based models of systemic risk.
Practical implementation of the BCBS Monitoring indicators for intraday liqui...Kimmo Soramaki
(1) The document discusses calculating the BCBS monitoring indicators for intraday liquidity management using data from interbank payment systems. (2) It argues that payment system operators like central banks are best placed to calculate most of the indicators efficiently using their existing payment data. (3) Combining the indicators with network and flow data from payment systems allows for more meaningful stress testing and identification of systemically important banks.
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COMPLEMENTARY CURRENCY AND ITS IMPACT ON THE ECONOMYIFLab
This document analyzes the potential impact of complementary currencies on a national economy. It begins by discussing how money is created in traditional capitalist economies through a two-stage process of central banks issuing debt and commercial banks providing loans. It then presents a system dynamics model to describe money issuance in economies with and without "inside money". As an example, it analyzes outcomes of a barter network in El Salvador and calculates spending multipliers. The main finding is that digital community currencies have greater spending multipliers than regular money markets. While the analyzed network is currently small, it could help cushion macroeconomic shocks by stabilizing aggregate demand.
Study of the Simulation and Optimization System of Interbank SettlementsSSA KPI
1. The document describes a computer simulation and optimization system for modeling interbank settlement flows and costs.
2. The system is based on a Poisson-lognormal model of settlement flows and performs iterative simulation and optimization of expected transaction costs using randomly generated samples of transaction flows.
3. The results presented are from applying the system to data from the Bank of Lithuania's payment and settlement system, with the goal of exploring different settlement management strategies to minimize costs.
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This document summarizes a seminar given by Dr. Kimmo Soramäki on identifying systemically important banks in payment systems and signals in market data. It discusses using the SinkRank algorithm to model liquidity flows in payment networks and identify banks that absorb liquidity from the system. It also discusses using correlation networks and minimum spanning trees to visualize correlations between financial assets and identify outliers. The seminar demonstrated FNA's software platform and HeavyTails service for automating such financial network analysis.
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Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
New approaches for payment system simulation research
1. New approaches for payment system simulation research Kimmo Soramäki www.soramaki.net www.financialnetworkanalysis.com TKK, Helsinki, 3.9.2007
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5. Fedwire liquidity flows Fedwire liquidity flows share many of the characteristics commonly found in other empirical complex networks - scale-free (power law) degree distribution - high clustering coefficient - small world phenomenon - short paths (avg 2.6) in spite of low connectivity (0.3%) - structure of networks persistent from day to day - heavily impacted by the terrorist attacks of 9/11, disruption lasted for ~10 days 6600 banks, 70,000 links 66 banks comprise 75% of value 25 banks completely connected
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7. Payment System When liquidity is high payments are submitted promptly and banks process payments independently of each other Instructions Payments Summed over the network, instructions arrive at a steady rate Liquidity Influence of liquidity 1
8. Reducing liquidity leads to episodes of congestion when queues build, and cascades of settlement activity when incoming payments allow banks to work off queues. Payment processing becomes coupled across the network Payment System Instructions Payments Liquidity Influence of liquidity 2
9. Payment System Instructions Payments At very low liquidity payments are controlled by internal dynamics. Settlement cascades are larger and can pass through the same bank numerous times Liquidity Influence of liquidity 3
10. Payment System Instructions Payments A liquidity market substantially reduces congestion using only a small fraction (e.g. 2%) of payment-driven flow Liquidity Market Influence of a liquidity market