Bilateral Exposures and Systemic Solvency Risk

Gouriéroux, Christian; Héam, Jean-Cyprien; Monfort, Alain

doi:10.2139/ssrn.2192469

Cited by 36 publications

(77 citation statements)

References 50 publications

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“…An independent study by Acemoglu, Ozdaglar, and Tahbaz-Salehi (2012)-as well as related earlier studies of Gouriéroux, Héam, and Monfort (2012) and Gai and Kapadia (2010)-are the closest to ours. 6 They each examine how shocks propagate through a network based on debt holdings or interbank lending, where shocks lead an organization to pay only a portion of its debts.…”

supporting

confidence: 85%

“…Building on that, we show how diversification and integration each affect the ingredients of financial cascades-and the final outcomes-in different and nonmonotonic ways. In doing so, we recover, as a special case, Gai and Kapadia's observation that cascades can 5 For example, see Rochet and Tirole (1996); Kiyotaki and Moore (1997) Diebold and Yilmaz (2011);Dette, Pauls, and Rockmore (2011);Gai, Haldane, and Kapadia (2011);Greenwood, Landier, and Thesmar (2012) ;Ibragimov, Jaffee, and Walden (2011); Upper (2011); Allen, Babus, and Carletti (2012);Cohen-Cole, Patacchini, and Zenou (2012) ;Gouriéroux, Héam, and Monfort (2012); Alvarez and Barlevy (2013) ;Glasserman and Young (2013);and Gofman (2013). 6 Cabrales, Gottardi, and Vega-Redondo (2013) study the trade-off between the risk-sharing enabled by greater interconnection and the greater exposure to cascades resulting from larger components in the financial network.…”

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confidence: 69%

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Financial Networks and Contagion

Elliott

Golub

Jackson

2014

American Economic Review

1,036

501

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Globalization brings with it increased financial interdependencies among many kinds of organizations-governments, central banks, investment banks, firms, etc.-that hold each other's shares, debts, and other obligations. Such interdependencies can lead to cascading defaults and failures, which are often avoided through massive bailouts of institutions deemed "too big to fail." Recent examples include the US government's interventions in AIG, Fannie Mae, Freddie Mac, and General Motors; and the European Commission's interventions in Greece and Spain. Although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries, they emphasize the need to study the risks created by a network of interdependencies. Understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent.In this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies. Organizations' values depend on each other-e.g., through cross-holdings of shares, debt, or other liabilities. If an

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supporting

confidence: 85%

mentioning

confidence: 69%

Financial Networks and Contagion

Elliott

Golub

Jackson

2014

American Economic Review

1,036

501

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“…It would be more realistic to include other types of exposures: For example, exposures with continuously varying values like asset cross-holdings (cf. Gouriéroux et al (2012) and Elliott et al (2014)), exposures with different seniorities, exposures with a non-zero recovery rate in the case of counterparty default, or exposures with different maturity dates. These considerations clearly go beyond the scope of the current paper and are left to future research.…”

Section: Discussionmentioning

confidence: 99%

Contagion in Financial Systems: A Bayesian Network Approach

Chong

Klüppelberg

2016

SSRN Journal

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We develop a structural default model for interconnected financial institutions in a probabilistic framework. For all possible network structures we characterize the joint default distribution of the system using Bayesian network methodologies. Particular emphasis is given to the treatment and consequences of cyclic financial linkages. We further demonstrate how Bayesian network theory can be applied to detect contagion channels within the financial network, to measure the systemic importance of selected entities on others, and to compute conditional or unconditional probabilities of default for single or multiple institutions.

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“…This can be accommodated by the trick of introducing a "fictitious bank" with label i = 0, that never defaults and lends amountsΩ i0 to other banks i ∈ [N ]. [Gourieroux et al, 2012] studied solvency cascades where banks may have equity crossholdings and debt structured with multiple seniority tranches.…”

Section: Bankruptcy Costsmentioning

confidence: 99%

Bank Panics and Fire Sales, Insolvency and Illiquidity

Hurd

2017

SSRN Journal

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Banking system crises are complex events that in a short span of time can inflict extensive damage to banks themselves and to the external economy. The crisis literature has so far identified a number of distinct effects or channels that can propagate distress contagiously both directly within the banking network itself and indirectly, between the network and the external economy. These contagious effects, and the potential events that trigger these effects, can explain most aspects of past crises, and are thought to be likely to dominate future financial crises. Since the current international financial regulatory regime based on the Basel III Accord does a good job of ensuring that banks are resilient to such contagion effects taken one at a time, systemic risk theorists increasingly understand that future crises are likely to be dominated by the spillovers between distinct contagion channels. The present paper aims to provide a model for systemic risk that is comprehensive enough to include the important contagion channels identified in the literature. In such a model one can hope to understand the dangerous spillover effects that are expected to dominate future crises. To rein in the number and complexity of the modelling assumptions, two requirements are imposed, neither of which is yet well-known or established in the main stream of systemic risk research. The first, called stock-flow consistency, demands that the financial system follows a rigorous set of rules based on accounting principles. The second requirement, called Asset-Liability symmetry, implies that every proposed contagion channel has a dual channel obtained by interchanging assets and liabilities, and that these dual channel pairs have a symmetric mathematical representation.

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Bilateral Exposures and Systemic Solvency Risk

Cited by 36 publications

References 50 publications

Financial Networks and Contagion

Financial Networks and Contagion

Contagion in Financial Systems: A Bayesian Network Approach

Bank Panics and Fire Sales, Insolvency and Illiquidity

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