PhiMac Seminar - Tom Hurd - Revisiting Systemic Contagion in Financial Networks

Description

HH - 410

Speaker: Tom Hurd (McMaster University)

Title: Revisiting Systemic Contagion in Financial Networks

Abstract: This talk provides a broad overview of what has been learned from 11 years of intensive financial systemic risk research since the Great Financial Crisis. Overall, we now understand more clearly that no narrow view of systemic risk can provide a convincing story that says the system is resilient. Central banking regulators now take systemic risk so seriously that a great burden of additional regulation has been placed on banks to make sure they do not become unduly systemically risky. It is therefore important that all banks, not just central banks, develop models of systemic risk to understand the rationale for this burden. One conceptual breakthrough is the identification of a wide range of different mechanisms through which the behaviour of any one bank when stressed can send dangerous shocks to its counterparty banks. While in principle such mechanisms can be combined into large scale simulation models for different systems, the reality is that the required databases are typically just not available. An interesting development on the theory side is using percolation on networks as a basis for understanding financial contagion. Looking to the future, one can discern important risks, notably the dangers of cross border spillovers and FX effects, that have not yet been well-studied by SR modellers.
Towards the end of the talk, I will briefly describe my recent efforts to create a unified framework for analyzing the global financial system. After discussing a number of simplifying assumptions, I propose a class of models called Inhomogeneous Random Financial Networks and discuss some of the hurdles to jump before such a framework can be useful in practise.
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