Diversification at Financial Institutions and Systemic Crises
TLDR
The authors showed that even though diversification reduces each institution's individual probability of failure, it makes systemic crises more likely, and that full diversification is no longer desirable as a result and the optimal degree of diversification may be arbitrarily low.About:
This article is published in Journal of Financial Intermediation.The article was published on 2010-07-01 and is currently open access. It has received 376 citations till now. The article focuses on the topics: Diversification (finance) & Systemic risk.read more
Citations
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Financial Networks and Contagion
TL;DR: In this article, the authors model contagions and cascades of failures among organizations linked through a network of financial interdependencies and identify how the network propagates discontinuous changes in asset values triggered by failures.
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Financial Networks and Contagion
TL;DR: In this paper, the authors study cascades of failures in a network of interdependent financial organizations: how discontinuous changes in asset values (e.g., defaults and shutdowns) trigger further failures, and how this depends on network structure.
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Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk
Stefano Battiston,Domenico Delli Gatti,Mauro Gallegati,Bruce C. Greenwald,Joseph E. Stiglitz +4 more
TL;DR: In this article, the authors show that a financial network can be most resilient for intermediate levels of risk diversification, and not when this is maximal, as generally thought so far, and this finding holds in the presence of the financial accelerator, i.e., when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent's subsequent performance through the reaction of the agents counterparties.
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Asset commonality, debt maturity and systemic risk
TL;DR: In this article, the authors develop a model in which asset commonality and short-term debt of banks interact to generate excessive systemic risk, and show that information contagion is more likely under clustered asset structures.
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Back to the basics in banking ? A micro-analysis of banking system stability
TL;DR: In this article, the authors analyzed the relationship between banks' divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash using extreme value analysis.
References
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Liquidation Values and Debt Capacity: A Market Equilibrium Approach
Andrei Shleifer,Robert W. Vishny +1 more
TL;DR: In this paper, the authors explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets and use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle.
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A Theory of Systemic Risk and Design of Prudential Bank Regulation
TL;DR: In this article, the authors model the risk of a bank's failure on the health of other banks as a correlation of returns on assets held by banks, and propose a collective risk-shifting incentive where all banks undertake correlated investments, thereby increasing aggregate risk.
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Coordination failures and the lender of last resort: was bagehot right after all?
Jean-Charles Rochet,Xavier Vives +1 more
TL;DR: In this paper, a model of banks' liquidity crises that possesses a unique Bayesian equilibrium is proposed, and it is shown that there is a positive probability that a solvent bank cannot find liquidity assistance in the market.
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Financial Intermediaries and Markets
Franklin Allen,Douglas Gale +1 more
TL;DR: In this article, the authors distinguish financial intermediaries according to whether they issue complete contingent contracts or incomplete contracts, and they argue that there may be a role for regulating liquidity provision in an economy in which markets for aggregate risks are incomplete.
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Too many to fail—An analysis of time-inconsistency in bank closure policies
TL;DR: The authors showed that bank closure policies also suffer from an implicit "too-many-to-fail" problem, where the regulator finds it ex-post optimal to bail out some or all failed banks, whereas when the number of failed banks is small, failed banks can be acquired by the surviving banks This gives banks incentives to herd and increases the risk that many banks may fail together.