Stefano Battiston: "Too complex to fail"

ETH Zurich www.sg.ethz.ch

Too Complex to FailConcentration and Complexity in Financial Networks

Stefano BattistonTowards a Sustainable Financial System, Stockholm

September 12, 2013

Stefano Battiston ETH Zurich www.sg.ethz.chToo Complex to Fail Acknowledgments

Acknowledgments

SNF-Professorship on Financial Networks and Systemic risk

Institute of Banking and Finance, UZH (from Fall 2013)

FOC: Forecasting Financial Crises - EU Project FET-OPEN(2010-2013).

Coord. G. Caldarelli (IMT Lucca), 14 partners, including ECB

SIMPOL: Financial Systems Simulation and Policy Modeling - EUProject FET-OPEN (2013-2015)

Coord. S. Battiston - Financial networks modeling, Crowd-sourcing:engaging people in mapping influence

INET (Inst. of New Econ. Thinking) - Finan. Stability Program,coord. J. Stiglitz (Columbia Univ.).

Activity on Financial Networks, chaired A. Haldane (BoE)

Towards a Sustainable Financial System, Stockholm September 12, 2013 2 / 17

Stefano Battiston ETH Zurich www.sg.ethz.chToo Complex to Fail Outline

Outline of the talk

Towards a sustainable financialsystem: key dimensions

Interdependence

Complexity

Concentration

Notion of economic value.

200 400 600 800 10000

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Time (days)

DebtR

ank


Stefano Battiston ETH Zurich www.sg.ethz.chToo Complex to Fail Interdependence

Interdependence



Interdependence



Interdependence



Interdependence



Balance Sheet Interlock and Distress Propagation









Comovements among CDS

Nodes:institutions withtraded CDS

Links:significant

co-movementsbetween spreads.


Stefano Battiston ETH Zurich www.sg.ethz.chToo Complex to Fail Complexity

Complexity

ComplexInstruments,e.g. derivatives

Complex networkof contracts



Complexity

Probability of default are interdependent: determination ofequilibrium can be not easy



Complexity

Probability of default are interdependent: determination ofequilibrium can be not easy


Stefano Battiston ETH Zurich www.sg.ethz.chToo Complex to Fail Concentration

Concentration

Concentration: how many relevant market players in the game.

1 Risk is more concentrated. Fewer egg baskets.

2 Higher chances of market power.

High concentration and strong interdependence together:

1 Higher systemic risk (a single big player can affect other big ones)

2 Higher risk of regulatory capture (big players share economicinterests, no collusion)



The Corporate Network

Equity ownership ties:influence and information

40 thousand TNC, 1million actors

1% of the actors: 80% ofinfluence

100 financial firms: 40%of influence.

Stock Debt

Em

plo

yees

Manage−

ment

Board

of

Directors

Corporation

Banks Stockholders Investors

elect

elect

cash−flow rights

Treasury shares

Outstanding shares

(Preferred shares)

Loans

Bonds

cash−flow rights

voting rights




































2 3 4 5 6 7 8 9 100

0.05

0.1

0.15

0.2

0.25

DEXIA

UBS

CREDIT SUISSE

DEUTSCHE BANK

COMMERZBANKBNP

SOCGEN

NATIXIS

BARCLAYS

RBS

HBOSUNICREDITO

MITSUBISHI UFJFORTIS

CITIGROUP

BOA

JPM

WELLS FARGO

WACHOVIAGSACHS

MERRILL LYNCHMORGAN STANLEY

Relative asset size (%)

Debt R

ank

10 b

Debt

90 b

Fragility

3

6

9



2 3 4 5 6 7 8 9 100

0.05

0.1

0.15

0.2

0.25

0.3

DEXIA

UBS

CREDIT SUISSEDEUTSCHE BANK

COMMERZBANKBNPSOCGEN

NATIXIS

BARCLAYSRBS

HBOSUNICREDITO


CITIGROUP

BOA

JPM

WELLS FARGO

WACHOVIAGSACHS

MERRILL LYNCHMORGAN STANLEY


Debt R

ank

10 b

Debt

90 b

Fragility

3

6

9



2 3 4 5 6 7 8 9 100.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

DEXIA

UBS

CREDIT SUISSE

DEUTSCHE BANK

COMMERZBANK BNP

SOCGEN

NATIXIS

BARCLAYS

RBS

HBOS

UNICREDITO

MITSUBISHI UFJ

FORTIS

CITIGROUP

BOA

JPM

WELLS FARGO

WACHOVIA

GSACHS

MERRILL LYNCH

MORGAN STANLEY


De

bt

Ra

nk

10 b

Debt

90 b

Fragility

3

6

9



2 3 4 5 6 7 8 9 100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

DEXIA

UBS

CREDIT SUISSE

DEUTSCHE BANK

COMMERZBANK BNP

SOCGEN

NATIXIS

BARCLAYSRBS

HBOS

UNICREDITO

MITSUBISHI UFJ

FORTIS

CITIGROUPBOAJPM

WELLS FARGO

WACHOVIAGSACHS

MERRILL LYNCH

MORGAN STANLEY


De

bt

Ra

nk

10 b

Debt

90 b

Fragility

3

6

9



2 3 4 5 6 7 8 9 100.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

DEXIA

UBS

CREDIT SUISSE

DEUTSCHE BANK

COMMERZBANK

BNP

SOCGEN

NATIXIS

BARCLAYSRBS

HBOS

UNICREDITO


CITIGROUP

BOA

JPMWELLS FARGO

WACHOVIA

GSACHSMERRILL LYNCH

MORGAN STANLEY


De

bt

Ra

nk

10 b

Debt

90 b

Fragility

3

6

9



2 3 4 5 6 7 8 9 100

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

DEXIA

UBS

CREDIT SUISSE

DEUTSCHE BANK

COMMERZBANKBNPSOCGEN

NATIXIS

BARCLAYS

RBS

HBOSUNICREDITO


CITIGROUP

BOA

JPM

WELLS FARGO

WACHOVIA

GSACHSMERRILL LYNCH

MORGAN STANLEY


Debt R

ank

10 b

Debt

90 b

Fragility

3

6

9



Interplay

When interdependence, complexity and concentration are so high:

AS IF we had one international mega-bank, or not?

Risks

Regulatory capture

Systemic distress

Social divide



Interplay

When interdependence, complexity and concentration are so high:

AS IF we had one international mega-bank, or not?

Risks

Regulatory capture

Systemic distress

Social divide



The Notion of Economic Value

Economic value: a social norm.

Investment decisions: where is drive to sustainability?



The Notion of Economic Value

Economic value: a social norm.

Investment decisions: where is drive to sustainability?



Conclusions

Scientific work on financial networks and systemic risk: problemsmay have deeper roots than we tend to think.

Seems good to reduce concentration, interdependence andcomplexity, together.

Proposals to reform bank organization could be examined in thislight.

At the same time: a serious effort to extending the notion ofeconomic value.



Related International Activities

SIMPOL (Financial Systems Simulation and Policy Modeling)

FOC (Forecasting Financial Crises)

GSS (Global Systems Science)

GSDP Global Systems and Policies

INET - Systemic Risk Task Force: WG Fin. Nets

MULTIPLEX (Theory of networks of networks)



References

Debtrank: [Battiston, Puliga, Kaushik, Tasca, Caldarelli, DebtRank:Too-central-to-fail? (2012) Sci. Rep. 2:541]

Complex derivatives [ Battiston, Caldarelli, Georg, May, Stiglitz, Nat. Phys., 2013]

CDS and network reconstruction [Kaushik R., Battiston S., 2013 PLoS-ONE, forth],[Puliga M., Kaushik R., Battiston S., Caldarelli G., 2013 in progress]

Estimation of systemic risk in networks from partial information: [Musmeci, Puliga,Gabrielli, Battiston, Caldarelli, JOSS 2013, forth.]

Controllability in e-mid [Delpini, Battiston, Riccaboni, Pammolli, Gabbi, Caldarelli,Sci. Rep., 2013, forth.]

Controllability in TARGET2 [Galbiati, Delpini, Battiston, (2013) Nat Phys]


Education

Stefano Battiston: "Too complex to fail"