https://pure.iiasa.ac.at/id/eprint/14094 2021-08-27T17:41:42Z info:eu-repo/semantics/descriptiveMetadata https://pure.iiasa.ac.at/id/eprint/14094/ Matching and Resilience in Financial Networks Leduc, M.V. Thurner, S. When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information ab out the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We show that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings can exist and are generally inefficient. This allows the regulator to effectively `rewire' the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume. 2016-11 Conference or Workshop Item NonPeerReviewed Leduc, M.V. <https://pure.iiasa.ac.at/view/iiasa/176.html> & Thurner, S. <https://pure.iiasa.ac.at/view/iiasa/307.html> (2016). Matching and Resilience in Financial Networks. In: 7th Annual Financial Market Liquidity Conference, 17-18 November 2016, Budapest, Hungary. http://www.uni-corvinus.hu/index.php?id=liquidity_conference info:eu-repo/semantics/humanStartPage