Abstract Against the background of the global financial crisis, we review recent literature on the debate about “too big to fail”. This is (still) one of the key issues in banking literature since it determines the conditions for adequate banking regulation, financial stability and economic...

Abstract The question whether central banks should bear responsibility for financial stability remains unanswered. In connection with the use of interest rates, it is therefore not clear whether and how the Taylor rule should be augmented by an additional financial stability term. This paper...

Abstract Deflation is currently considered as one of the most important threats for macroeconomic dynamics and, thus, it is argued that it should be avoided by all available means. We challenge this view because empirically it cannot be verified that deflation periods necessarily go hand in hand...

Abstract We study the impact of central clearing of over-the-counter (OTC) transactions on counterparty exposures in a market with OTC transactions across several asset classes with heterogeneous characteristics. The impact of introducing a central counterparty (CCP) on expected interdealer...

Abstract We study a preferred equity infusion government program set to mitigate interbank contagion. Financial institutions are prone to insolvency risk channeled through the network of interbank debt and to funding liquidity risk. The government seeks to maximize, under budget constraints,...

Abstract We consider convex risk measures in a spatial setting, where the outcome of a financial position depends on the states at different nodes of a network. In analogy to the theory of Gibbs measures in Statistical Mechanics, we discuss the local specification of a global risk measure...

Abstract Financial institutions’ interconnectedness is a key component of systemic risk. However there is still no consensus on its measurement. Using a unique database of network of exposures of French financial institutions, we compare three strategies to measure interconnectedness:...

Abstract We develop a novel stress-test framework to monitor systemic risk in financial systems. The modular structure of the framework allows to accommodate for a variety of shock scenarios, methods to estimate interbank exposures and mechanisms of distress propagation. The main features are as...

Abstract This paper provides a framework for modeling the financial system with multiple illiquid assets when liquidation of illiquid assets is caused by failure to meet a leverage requirement. This extends the network model of [ 6 ] which incorporates a single asset with fire sales and capital...

Abstract The goal of this paper is to study organized flocking behavior and systemic risk in heterogeneous mean-field interacting diffusions. We illustrate in a number of case studies the effect of heterogeneity in the behavior of systemic risk in the system, i.e., the risk that several agents...