Elimination of systemic risk in financial networks by means of a systemic risk transaction tax

Poledna S & Thurner S (2014). Elimination of systemic risk in financial networks by means of a systemic risk transaction tax. arXiv:1401.8026 [q-fin.RM]

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Financial markets are exposed to systemic risk (SR), the risk that a major fraction of the system ceases to function and collapses. Since recently it is possible to quantify SR in terms of underlying financial networks where nodes represent financial institutions, and links capture the size and maturity of assets (loans), liabilities, and other obligations such as derivatives. We show that it is possible to quantify the share of SR that individual liabilities in a financial network contribute to the overall SR. We use empirical data of nation-wide interbank liabilities to show that a few liabilities carry the major fraction of the overall SR. We propose a tax on individual transactions that is proportional to their contribution to overall SR. If a transaction does not increase SR it is tax free. With an agent based model (CRISIS macro-financial model) we demonstrate that the proposed Systemic Risk Tax (SRT) leads to a self-organized re-structuring of financial networks that are practically free of SR. ABM predictions agree remarkably well with the empirical data and can be used to understand the relation of credit risk and SR.

Item Type: Other
Uncontrolled Keywords: Systemic risk; DebtRank; Agent based model; Self-organized criticality; Multiplex network
Research Programs: Advanced Systems Analysis (ASA)
Bibliographic Reference: arXiv:1401.8026 [q-fin.RM]
Depositing User: IIASA Import
Date Deposited: 15 Jan 2016 08:51
Last Modified: 20 Jan 2016 16:49
URI: http://pure.iiasa.ac.at/11211

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