Endogenous Financial Networks: Efficient Modularity and Why Shareholders Prevent it

The Global Banking Network in the Aftermath of the Crisis: Is There Evidence of De-globalization?

“…Our measurement of network fragmentation is closely related to academic and policy debates such as Haldane (2010) who argues that fragmented structures can strengthen system resilience. This notion is further rationalized in Elliott and Hazell (2016) that modular structures could be socially efficient in an endogenous financial network. However, Elliott and Hazell (2016) also indicates that such structures may not be stable.…”

“…This notion is further rationalized in Elliott and Hazell (2016) that modular structures could be socially efficient in an endogenous financial network. However, Elliott and Hazell (2016) also indicates that such structures may not be stable. More research effort is thus needed to investigate the relationship between regionalization and risk in the global banking system, explanations of the structural change, and implications for macroprudential policy-making and surveillance.…”

Solvency Distress Contagion Risk: Network Structure, Bank Heterogeneity and Systemic Resilience

“…Reflecting this property, Elliott & Hazell (2016) conclude that the socially optimal network is the one in which institutions form clusters such that connections within the clusters are very strong but inter-cluster links are weak. This arrangement allows sharing the risk of small shocks within the clusters; but means that if there is a large shock to a particular bank that causes defaults of other banks within its cluster also default, the weak intercluster links work as firewalls and prevent propagation to other groups.…”

Cross-ownership and portfolio choice

“…The numerical analysis uses the analytical formulation obtained in the Appendix and the code can be obtained from the authors.11 Note that firms in this cluster also have cross-holding with firms outside the cluster. We allocate these shares to an external investor, which, in line with our model, is represented by the manager12 In this picture we ignored, for clarity, three linkages of less than 3% 13. The capital available to the firm for private investment in the risky project may vary.…”