Systemic risk in financial networks
Prof. Dr. Thilo Meyer-Brandis
The financial crisis has demonstrated that systemic risk due to the interconnectedness of financial-market participants – such as financial institutions, insurers, governments and, even, regulators themselves – can dramatically amplify the consequences of isolated shocks to financial systems and pose a serious threat to prosperity and social stability. The traditional approach to risk control in financial mathematics is to apply risk measures to single institutions. However, this strategy fails to capture systemic risk because it treats institutions as if they were in isolation, and recent literature in financial mathematics has started to develop various approaches to rectify this deficiency. One promising line of research is based on modeling explicitly the network of inter- bank exposures and to analyze the various propagation channels of systemic risk in the financial system. One of the main challenges is then to introduce appropriate measures that help to monitor systemic risk. We will propose some examples of systemic risk measures which are inspired by an extension of the theory of monetary risk measures in financial mathematics. Further, we will present some results on de- fault cascades and the resilience of financial networks that are implied by an asymptotic analysis when the network gets large.