We review heterogeneous agent-based models of financial stability and their application in stress tests. In contrast to the mainstream approach, which relies heavily on the rational expectations assumption and focuses on situations where it is possible to compute an equilibrium, this approach...

In this paper we study systemic risk for the US and Europe. We show that banks' exposures to common risk factors are crucial for systemic risk. We come to this conclusion by first showing that relations between US and European banks are smaller than within each region. We then show that European...

Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand...

This paper focuses on the need for a lex specialis for resolution of insolvent banks and other financial institutions serving similar functions, and on requirements for making resolution procedures effective. After a review of the objectives of general insolvency law and the special...

The rise of a crisis-prone banking sector and its political power has received significant attention following the most recent financial crisis. The crisis sparked a growing interest in understanding how and why we have created a world of large, unstable banks. Excessive banking activity arose...

This paper studies the relation between bank herding and financial system stability. I develop a set of bank-specific, time-varying measures of herding in asset, liability, and off-balance sheet (OBS) portfolios and empirically examine the relation between bank herding and systemic risk...

We find that the level of bank herding in real estate loans during boom period is substantially higher than the level of bank herding in commercial and industrial loans or consumer loans. More importantly, we find that bank herding significantly increases systemic risk. In particular, herding in...

China’s banking system has seen increasing convergence in exposures to different asset types. These concentrated commonalities have far reaching implications on systemic financial risk. Based on the commonality structure of banks’ balance sheets, we construct a bipartite financial network...