Systemic Risk in Financial Networks: A Survey

Jackson, Matthew O.; Pernoud, Agathe

doi:10.2139/ssrn.3651864

Cited by 13 publications

(6 citation statements)

References 164 publications

(210 reference statements)

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“…The SEC's Associate Director of Trading and Markets, Michael Macchiaroli (2009) emphasized that "the Commission did not relax any requirements at the holding company level because previously there had been no requirements." 2 The extreme leverage of the five investment banks, the existential crises faced by all of them in 2008, and the big post-crisis drop in leverage of the two survivors (Goldman Sachs and Morgan Stanley), all support a view that the SEC had not supervised the investment banks (or their subsidiaries) adequately from the viewpoint of solvency. The Inspector General of the Securities and Exchange Commission (2008) found that the SEC's Division of Trading and Markets "became aware of numerous potential red flags prior to Bear Stearns' collapse [in March 2007], regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain Basel II standards, but did not take actions to limit these risk factors.…”

Section: Regulators Failed To Safeguard Financial Stabilitymentioning

confidence: 99%

Prone to Fail: The Pre-Crisis Financial System

Duffie

2019

Journal of Economic Perspectives

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The financial crisis that began in 2007 was triggered by over-leveraged homeowners and a severe downturn in US housing markets. However, a reasonably well-supervised financial system would have been much more resilient to this and other types of severe shocks. Instead, the core of the financial system became a key channel of propagation and magnification of losses suffered in the housing market. Critical financial intermediaries failed, or were bailed out, or dramatically reduced their provision of liquidity and credit to the economy. In short, the core financial system ceased to perform its intended functions for the real economy at a reasonable level of effectiveness. As a result, the impact of the housing-market shock on the rest of the economy was much larger than necessary. In this essay, I will review the key sources of fragility in the core financial system. I discuss the weakly supervised balance sheets of the largest banks and investment banks; the run-prone designs and weak regulation of the markets for securities financing and over-the-counter derivatives; the undue reliance of regulators on “market discipline; and the interplay of too-big-to-fail and the failure of market discipline. Finally, I point to some significant positive strides that have been made since the crisis: improvements in the capitalization of the largest financial institutions, a reduction of unsafe practices and infrastructure in the markets for securities financing and derivatives, and a significantly reduced presumption that the largest financial firms will be bailed out by taxpayer money in the future. But I will also mention some remaining challenges to financial stability that could be addressed with better regulation and market infrastructure.

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Section: Regulators Failed To Safeguard Financial Stabilitymentioning

confidence: 99%

Prone to Fail: The Pre-Crisis Financial System

Duffie

2019

Journal of Economic Perspectives

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“…Network strategies have also been largely applied in research on financial intermediation. Jackson and Pernoud (2020) provide an overview of the relationship between financial networks and systemic risks.…”

Section: Credit Scoring Using Ai/ml and Alternative Datamentioning

confidence: 99%

A Survey of Fintech Research and Policy Discussion

Allen

Jagtiani

2021

RCF

177

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The intersection of finance and technology, known as fintech, has resulted in the dramatic growth of innovations and has changed the entire financial landscape. While fintech has a critical role to play in democratizing credit access to the unbanked and thin-file consumers around the globe, those consumers who are currently well served also turn to fintech for faster services and greater transparency. Fintech, particularly the blockchain, has the potential to be disruptive to financial systems and intermediation. Our aim in this paper is to provide a comprehensive fintech literature survey with relevant research studies and policy discussion around the various aspects of fintech. The topics include marketplace and peer-to-peer lending; credit scoring; alternative data; distributed ledger technologies; blockchain; smart contracts; cryptocurrencies and initial coin offerings; central bank digital currency; robo-advising; quantitative investment and trading strategies; cybersecurity; identity theft; cloud computing; use of big data, artificial intelligence, and machine learning; identity and fraud detection; anti-money laundering; Know Your Customers; natural language processing; regtech; insuretech; sandboxes; and fintech regulations.

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“…Indeed, eight years after the passage of Dodd-Frank, and nearly a decade after the banking agencies began to work on stronger capital and liquidity regulation, the new regulatory framework in place is still not completed, with numerous proposed regulations not having been finalized. 5 Dodd-Frank affords substantial discretion to the regulatory agencies. The merit of this approach is that it allows for a more finely tuned and informed regulatory implementation.…”

Section: A First Risk: Degradation Of the Resiliency Of Large Bankingmentioning

confidence: 99%

Financial Regulation: Still Unsettled a Decade After the Crisis

Tarullo

2019

Journal of Economic Perspectives

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A decade after the darkest moments of the financial crisis, both the US financial system and the legal framework for its regulation are still in flux. The post-crisis regulatory framework has made systemically important banks much more resilient. They are substantially better capitalized and less dependent on runnable short-term funding. But the current regulatory framework does not deal effectively with threats to financial stability outside the perimeter of regulated banking organizations, notably from forms of shadow banking. Moreover, with the political tide having for the moment turned decisively toward deregulation, there is some question whether the resiliency improvements of the largest banks will be preserved. This article assesses the accomplishments, unfinished business, and outstanding issues in the post-crisis approach to prudential regulation.

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Systemic Risk in Financial Networks: A Survey

Cited by 13 publications

References 164 publications

Prone to Fail: The Pre-Crisis Financial System

Prone to Fail: The Pre-Crisis Financial System

A Survey of Fintech Research and Policy Discussion

Financial Regulation: Still Unsettled a Decade After the Crisis

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