eprintid: 14094 rev_number: 7 eprint_status: archive userid: 353 dir: disk0/00/01/40/94 datestamp: 2016-12-07 09:16:04 lastmod: 2021-08-27 17:41:42 status_changed: 2016-12-07 09:16:04 type: conference_item metadata_visibility: show item_issues_count: 2 creators_name: Leduc, M.V. creators_name: Thurner, S. creators_id: 8754 creators_id: 1918 title: Matching and Resilience in Financial Networks ispublished: pub divisions: prog_asa abstract: 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. date: 2016-11 date_type: published official_url: http://www.uni-corvinus.hu/index.php?id=liquidity_conference creators_browse_id: 176 creators_browse_id: 307 full_text_status: none pres_type: paper event_title: 7th Annual Financial Market Liquidity Conference event_location: Budapest, Hungary event_dates: 17-18 November 2016 event_type: conference refereed: FALSE coversheets_dirty: FALSE fp7_project: no fp7_type: info:eu-repo/semantics/conferenceObject citation: Leduc, M.V. & Thurner, S. (2016). Matching and Resilience in Financial Networks. In: 7th Annual Financial Market Liquidity Conference, 17-18 November 2016, Budapest, Hungary.