Stefano Battiston: "Too complex to fail"

ETH Zurich www.sg.ethz.ch
Too Complex to Fail
Concentration and Complexity in Financial Networks
Stefano Battiston
Towards a Sustainable Financial System, Stockholm
September 12, 2013

Stefano Battiston ETH Zurich www.sg.ethz.ch
Too Complex to Fail Acknowledgments
Acknowledgments
SNF-Professorship on Financial Networks and Systemic risk
Institute of Banking and Finance, UZH (from Fall 2013)
FOC: Forecasting Financial Crises - EU Project FET-OPEN
(2010-2013).
Coord. G. Caldarelli (IMT Lucca), 14 partners, including ECB
SIMPOL: Financial Systems Simulation and Policy Modeling - EU
Project FET-OPEN (2013-2015)
Coord. S. Battiston - Financial networks modeling, Crowd-sourcing:
engaging people in mapping inﬂuence
INET (Inst. of New Econ. Thinking) - Finan. Stability Program,
coord. J. Stiglitz (Columbia Univ.).
Activity on Financial Networks, chaired A. Haldane (BoE)
Towards a Sustainable Financial System, Stockholm September 12, 2013 2 / 17

Too Complex to Fail Outline
Outline of the talk
Towards a sustainable ﬁnancial
system: key dimensions
Interdependence
Complexity
Concentration
Notion of economic value.
200 400 600 800 1000
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Time (days)
DebtRank

Too Complex to Fail Interdependence
Interdependence

Balance Sheet Interlock and Distress Propagation

Comovements among CDS
Nodes:
institutions with
traded CDS
Links:
signiﬁcant
co-movements
between spreads.

Too Complex to Fail Complexity
Complexity
Complex
Instruments,
e.g. derivatives
Complex network
of contracts

Too Complex to Fail Complexity
Complexity
Probability of default are interdependent: determination of
equilibrium can be not easy

Too Complex to Fail Concentration
Concentration
Concentration: how many relevant market players in the game.
1 Risk is more concentrated. Fewer egg baskets.
2 Higher chances of market power.
High concentration and strong interdependence together:
1 Higher systemic risk (a single big player can aﬀect other big ones)
2 Higher risk of regulatory capture (big players share economic
interests, no collusion)

The Corporate Network
Equity ownership ties:
influence and information
40 thousand TNC, 1
million actors
1% of the actors: 80% of
influence
100 financial firms: 40%
of influence.
Stock Debt
Employees
Manage−
ment
Board
of
Directors
Corporation
BanksStockholders Investors
elect
elect
cash−flow rights
Treasury shares
Outstanding shares
(Preferred shares)
Loans
Bonds
cash−flow rights
voting rights

The Corporate Network
Equity ownership ties:
influence and information
40 thousand TNC, 1
million actors
1% of the actors: 80% of
influence
100 financial firms: 40%
of influence.

2 3 4 5 6 7 8 9 10
0
0.05
0.1
0.15
0.2
0.25
DEXIA
UBS
CREDIT SUISSE
DEUTSCHE BANK
COMMERZBANK
BNPSOCGEN
NATIXIS
BARCLAYS
RBS
HBOS
UNICREDITO
MITSUBISHI UFJ
FORTIS
CITIGROUP
BOA
JPM
WELLS FARGO
WACHOVIA
GSACHS
MERRILL LYNCH
MORGAN STANLEY
Relative asset size (%)
DebtRank
10 b
Debt
90 b
Fragility
3
6
9

2 3 4 5 6 7 8 9 10
0
0.05
0.1
0.15
0.2
0.25
0.3
DEXIA
UBS
CREDIT SUISSE
DEUTSCHE BANK
COMMERZBANK
BNPSOCGEN
NATIXIS
BARCLAYSRBS
HBOS
UNICREDITO
MITSUBISHI UFJ
FORTIS
CITIGROUP
BOA
JPM
WELLS FARGO
WACHOVIA
GSACHS
MERRILL LYNCH
MORGAN STANLEY
DebtRank
10 b
Debt
90 b
Fragility
3
6
9

2 3 4 5 6 7 8 9 10
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
DEXIA
UBS
CREDIT SUISSE
DEUTSCHE BANK
COMMERZBANK BNP
SOCGEN
NATIXIS
BARCLAYS
RBS
HBOS
UNICREDITO
MITSUBISHI UFJ
FORTIS
CITIGROUP
BOA
JPM
WELLS FARGO
WACHOVIA
GSACHS
MERRILL LYNCH
MORGAN STANLEY
DebtRank
10 b
Debt
90 b
Fragility
3
6
9

2 3 4 5 6 7 8 9 10
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
DEXIA
UBS
CREDIT SUISSE
DEUTSCHE BANK
COMMERZBANK BNP
SOCGEN
NATIXIS
BARCLAYSRBS
HBOS
UNICREDITO
MITSUBISHI UFJ
FORTIS
CITIGROUPBOA
JPM
WELLS FARGO
WACHOVIA
GSACHS
MERRILL LYNCH
MORGAN STANLEY
DebtRank
10 b
Debt
90 b
Fragility
3
6
9

2 3 4 5 6 7 8 9 10
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
DEXIA
UBS
CREDIT SUISSE
DEUTSCHE BANK
COMMERZBANK
BNP
SOCGEN
NATIXIS
BARCLAYSRBS
HBOS
UNICREDITO
MITSUBISHI UFJ
FORTIS
CITIGROUP
BOA
JPM
WELLS FARGO
WACHOVIA
GSACHSMERRILL LYNCH
MORGAN STANLEY
DebtRank
10 b
Debt
90 b
Fragility
3
6
9

2 3 4 5 6 7 8 9 10
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
DEXIA
UBS
CREDIT SUISSE
DEUTSCHE BANK
COMMERZBANK
BNPSOCGEN
NATIXIS
BARCLAYS
RBS
HBOS
UNICREDITO
MITSUBISHI UFJ
FORTIS
CITIGROUP
BOA
JPM
WELLS FARGO
WACHOVIA
GSACHSMERRILL LYNCH
MORGAN STANLEY
DebtRank
10 b
Debt
90 b
Fragility
3
6
9

Interplay
When interdependence, complexity and concentration are so high:
AS IF we had one international mega-bank, or not?

Interplay
When interdependence, complexity and concentration are so high:
AS IF we had one international mega-bank, or not?
Risks
Regulatory capture
Systemic distress
Social divide

The Notion of Economic Value
Economic value: a social norm.

The Notion of Economic Value
Economic value: a social norm.
Investment decisions: where is drive to sustainability?

Conclusions
Scientific work on financial networks and systemic risk: problems
may have deeper roots than we tend to think.
Seems good to reduce concentration, interdependence and
complexity, together.
Proposals to reform bank organization could be examined in this
light.
At the same time: a serious effort to extending the notion of
economic value.

Related International Activities
SIMPOL (Financial Systems Simulation and Policy Modeling)
FOC (Forecasting Financial Crises)
GSS (Global Systems Science)
GSDP Global Systems and Policies
INET - Systemic Risk Task Force: WG Fin. Nets
MULTIPLEX (Theory of networks of networks)

References
Debtrank: [Battiston, Puliga, Kaushik, Tasca, Caldarelli, DebtRank:
Too-central-to-fail? (2012) Sci. Rep. 2:541]
Complex derivatives [ Battiston, Caldarelli, Georg, May, Stiglitz, Nat. Phys., 2013]
CDS and network reconstruction [Kaushik R., Battiston S., 2013 PLoS-ONE, forth],
[Puliga M., Kaushik R., Battiston S., Caldarelli G., 2013 in progress]
Estimation of systemic risk in networks from partial information: [Musmeci, Puliga,
Gabrielli, Battiston, Caldarelli, JOSS 2013, forth.]
Controllability in e-mid [Delpini, Battiston, Riccaboni, Pammolli, Gabbi, Caldarelli,
Sci. Rep., 2013, forth.]
Controllability in TARGET2 [Galbiati, Delpini, Battiston, (2013) Nat Phys]

Stefano Battiston: "Too complex to fail"

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