Incentivizing Resilience in Financial Networks

14630 11 77885 4 214984 document 77885 1-s2.0-S0165188917301161-main.pdf application/pdf d202b43933e170a053fe39282f0f9413 MD5 2126376 2017-06-01 08:55:21 https://pure.iiasa.ac.at/id/eprint/14630/1/1-s2.0-S0165188917301161-main.pdf 14630 1 1 application/pdf text en public cc_by_nc_nd_4

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accepted 77886 2 214987 document 77886 lightbox.jpg image/png dc649bb20f67a2e10e2765e11ab3f4ff MD5 22710 2017-06-01 08:55:52 https://pure.iiasa.ac.at/id/eprint/14630/2/lightbox.jpg 14630 2 2 image/png other Thumbnails conversion from text to thumbnail_lightbox en staffonly

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http://eprints.org/relation/isVersionOf https://pure.iiasa.ac.at/id/document/77885 http://eprints.org/relation/isVolatileVersionOf https://pure.iiasa.ac.at/id/document/77885 http://eprints.org/relation/isIndexCodesVersionOf https://pure.iiasa.ac.at/id/document/77885 archive 5 disk0/00/01/46/30 2017-05-31 13:08:22 2021-08-27 17:29:03 2017-05-31 13:08:22 article show 2 Leduc M.V. 8754 Thurner S. 1918 Incentivizing Resilience in Financial Networks pub prog_asa 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 about 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 use an equilibrium concept inspired by the matching markets literature to show analytically 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 exist, which are generally inefficient. This allows the regulator to effectively stimulate a ‘rewiring’ of 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. 2017-05-26 published Elsevier 10.1016/j.jedc.2017.05.010 176 307 public Journal of Economic Dynamics and Control 82 44-66 TRUE 01651889 FALSE info:eu-repo/semantics/article