Ecology for bankers

May, Robert M.; Levin, Simon A.; Sugihara, George

doi:10.1038/451893a

Cited by 672 publications

(328 citation statements)

References 7 publications

(8 reference statements)

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Section: Literature Review On Complex Network Methodologymentioning

confidence: 99%

“…The 2007 US financial crisis becomes another driving force of this line of the research. At this stage researchers have started to apply complex system theory to disclose topology and features of different financial markets such as international trade network, investment network, interbank clearing network [10].There are three issues in the current literature that need to be addressed and can be improved: first, the current research has focused on the disclosure of topology of the financial network, the study on dynamics and the interaction between the dynamics and topology are limited; second, the application of knowledge from both economics and complex system is rather mechanic; third, arXiv:1403.1363v1 [physics.soc-ph] …”

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confidence: 99%

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International transmission of shocks and fragility of a bank network

Feng

Kim

2014

Physica A: Statistical Mechanics and its Applications

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The weighted and directed network of countries based on the number of overseas banks is analyzed in terms of its fragility to the banking crisis of one country. We use two different models to describe transmission of shocks, one local and the other global. Depending on the original source of the crisis, the overall size of crisis impacts is found to differ country by country. For the two-step local spreading model, it is revealed that the scale of the first impact is determined by the out-strength, the total number of overseas branches of the country at the origin of the crisis, while the second impact becomes more serious if the in-strength at the origin is increased. For the global spreading model, some countries named "triggers" are found to play important roles in shock transmission, and the importance of the feed-forward-loop mechanism is pointed out. We also discuss practical policy implications of the present work. I. BACKGROUNDThe increasing globalization provides important advantages in terms of risk sharing and risk diversification in banking and financial markets, but it also facilitates the risk spreading among different nations [1]. The recent financial crisis or shock, originated from United States (US) and spread to other countries, has witnessed that many overseas banks cut back their loans to the local markets and withdrew their representations. The withdrawals cause the liquidity shortage of the host countries which then lead to subsequent withdrawals of the host countries' overseas branches in the crisis attacked countries. This process can continue and the shocks in this situation are hence defined as sequential shocks in this study.There are abundant literature on transmission mechanism of shocks in global banking: [2] examines how Japanese asset bubbles have been transmitted to US via lending responses of Japanese overseas banks in US in the 80's; [3] explores the mechanism of 1998 Russian debt default as a negative liquidity shock to international banking and its impacts on the banking of Peru; [4] studies the effect of financial distress in foreign parent banks on the local SME (small and medium enterprises) financing in 14 central and eastern European countries during the early stage of the 2007 financial crisis.Within the framework of complex network theory, this paper introduces models for shock transmission and examines the different impacts of the sequential shocks on the global banking network. We find that the damage of the shocks is closely related to the directionality of the edges and the network topology plays an important role. * Corresponding author: beomjun@skku.edu II. LITERATURE REVIEW ON COMPLEX NETWORK METHODOLOGYThe research using complex system approach in banking has also experienced three stages of the development. In the earlier stage, [6] claims that the possibility of contagion effect depends on the structure of interbank linkages. They believe that a "complete structure of linkages" will share the risk more easily than "an incomplete structure", hence the risk sh...

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Section: Literature Review On Complex Network Methodologymentioning

confidence: 99%

mentioning

confidence: 99%

International transmission of shocks and fragility of a bank network

Feng

Kim

2014

Physica A: Statistical Mechanics and its Applications

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“…Apart from the seemingly contradicting results drawn from different streams of studies, researchers have been under pressure (see for example [SLU09], [MLS08] and [Hal09]) to employ the recent advances in network theory and fill the gap between the financial systemic risk studies and some other fields of study such as epidemiology and ecosystems, which routinely use concepts such as the "small-world effect" (six degrees of separation principle), "scale-free" feature (most nodes have very few link connections and very few nodes have many connections), and "Achilles heel" (robust yet fragile network).…”

Section: Why Was the Network Initially Formed ?mentioning

confidence: 99%

An Agent-Based Computational Model for Bank Formation and Interbank Networks

Ismail¹

2013

Handbook on Systemic Risk

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The aim of this thesis is to study the role of banking in society and the effect of the interbank market on the performance of the banking system. It starts by reviewing several studies conducted on empirical banking networks and highlighting their salient features in the context of modern network theory. A simulated network resembling the characteristics documented in the empirical studies is then built and its resilience is analyzed with a particular emphasis in documenting the crucial role played by highly interconnected banks.It is our belief that the study of systemic risk and contagion in a banking system is an integral part to the study of the economic role of banks themselves. Thus the current work focuses on the fundamentals of banking and aims at identifying the necessary drivers for a dynamical setup of the interbank market.Through an agent-based model, we address the issues of bank formation, bank runs and the emergence of an interbank market. Starting with heterogeneous individuals, bank formation is viewed as an emergent phenomenon arising to meet the needs for investment opportunities in face of uncertain liquidity preferences. When banks work in isolation (no interbank market), in the long run and through a long experience with bank failures, banking turns into a monopoly or a market with few players.By equipping banks with their own learning tools and allowing an interbank market to develop, fewer bank failures and a less concentrated banking system are witnessed.In addition, through a scenario analysis, it is demonstrated that allowing banks to interact does not weaken the banking system in almost all the cases, and improves the performance on multiple occasions.The work is concluded by studying the effects of a banking system on individuals and the economy in what is called social measures. We establish that the effects of banking on social measures such as consumption level, consumption inequality between individuals, long term investment and economic waste, varies significantly based on the structure of the society.iii

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“…As a result of these dispersed efforts, after the 2007-2009 financial crisis ecological insights have been more commonly used to understand the resilience of financial markets (Battiston et al, 2016;May, Levin, & Sugihara, 2008). Some examples of concepts from ecology and complex systems that are becoming increasingly frequent in the finance literature are tipping points (Scheffer et al, 2012), warning signs (Scheffer et al, 2009), relationships between the structural properties of system and its resilience (e.g.…”

Section: 2)mentioning

confidence: 99%

“…The AKM model is an agent-based simulation developed in the ecological tradition 42 to explore the relationship between the structure and the stability of the system (Farmer, 2002;Haldane & May, 2011;May et al, 2008). Agents in the model are banks that are connected by borrowing and lending relationships established at the interbank market.…”

Section: Model Overviewmentioning

confidence: 99%

The Ecology of Financial Markets

Bouchaud¹,

Bonart

Donier³

et al.

Trades, Quotes and Prices

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This dissertation is motivated by the 2007-2009 financial crisis and the failure of the mainstream economic methodology to detect the increased fragility of the pre-crisis financial system. I explore the viability of alternative approaches focusing on the methodological blind spots that were revealed by the financial crisis. In particular, I focus on ecological approaches since economics and ecology share many phenomenological similarities but harbor many opposing methodological doctrines, which make them complementary. The collection of projects presented here is my attempt at facilitating crosspollination between the two disciplines dealing with similar problems. The first project considers the connections between ecology and economics, and provides a historical account of how analogical models inspired by different research paradigms led to the development of two contrasting methodological perspectives in economics, the classical physics worldview and the life sciences worldview. I find that the recent financial crisis precipitated a shift in economic methodology towards approaches inspired by life sciences.In the remaining two projects I apply ecological models to finance by combining network approaches with agent-based simulations to study contagion in banking systems. In the first simulation study I explore the impact of uncertainty on the stability of banking networks and show that information asymmetries lead to a striking increase in the risk of system collapse after a financial shock. In the second simulation study I investigate the relationship between concentration and resilience in banking systems. I find, counterintuitively, that an increase in concentration can be beneficial for system stability in certain conditions. Specifically, when concentration is decoupled from inequality, its increase can improve system resilience. Taken together, this thesis shows that ecological approaches can be fruitfully used to illuminate economic problems.

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Ecology for bankers

Cited by 672 publications

References 7 publications

International transmission of shocks and fragility of a bank network

International transmission of shocks and fragility of a bank network

An Agent-Based Computational Model for Bank Formation and Interbank Networks

The Ecology of Financial Markets

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