The structural fragility of financial systems Analysis and modeling implications for early warning systems

The structural fragility of financial systems Analysis and modeling implications for early... Purpose – Lessons from the most recent financial crisis show specific vulnerabilities of financial markets due to weaknesses in the structure of the financial system (structural fragility). As the literature points out, the impact of systemic risk can be closely related to issues of concentration (“too big to fail”) and dependency (“too connected to fail”). However, different structural variables are emphasized in various ways, and most authors analyze each variable separately. This raises the questions of how structural fragility, as a cause of systemic distress, can be assessed more comprehensively and consistently, and what the implications are for modeling it within an integrated systemic risk framework. This paper seeks to address these issues. Design/methodology/approach – On the basis of theoretical considerations and in the light of current transformations in financial markets, this paper explores elements of structural fragility and the requirements for modeling them. Findings – The paper suggests an extended approach for conceptualizing structural fragility, evaluates directions for quantifying structural issues in early warning systems (EWSs) for systemic crises, and lays a theoretical groundwork for further empirical studies. Originality/value – The need for supervisory actions to prevent crises is urgent, as is the need for integrating structural aspects into EWSs for systemic financial crises. Since a significant aspect of a financial firm's risk comes from outside the firm, individual institutions should understand and monitor the structural aspects of the various risk networks they are in. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

The structural fragility of financial systems Analysis and modeling implications for early warning systems

The Journal of Risk Finance, Volume 12 (4): 21 – Aug 16, 2011

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1526-5943
DOI
10.1108/15265941111158460
Publisher site
See Article on Publisher Site

Abstract

Purpose – Lessons from the most recent financial crisis show specific vulnerabilities of financial markets due to weaknesses in the structure of the financial system (structural fragility). As the literature points out, the impact of systemic risk can be closely related to issues of concentration (“too big to fail”) and dependency (“too connected to fail”). However, different structural variables are emphasized in various ways, and most authors analyze each variable separately. This raises the questions of how structural fragility, as a cause of systemic distress, can be assessed more comprehensively and consistently, and what the implications are for modeling it within an integrated systemic risk framework. This paper seeks to address these issues. Design/methodology/approach – On the basis of theoretical considerations and in the light of current transformations in financial markets, this paper explores elements of structural fragility and the requirements for modeling them. Findings – The paper suggests an extended approach for conceptualizing structural fragility, evaluates directions for quantifying structural issues in early warning systems (EWSs) for systemic crises, and lays a theoretical groundwork for further empirical studies. Originality/value – The need for supervisory actions to prevent crises is urgent, as is the need for integrating structural aspects into EWSs for systemic financial crises. Since a significant aspect of a financial firm's risk comes from outside the firm, individual institutions should understand and monitor the structural aspects of the various risk networks they are in.

Journal

The Journal of Risk FinanceEmerald Publishing

Published: Aug 16, 2011

Keywords: Financial market vulnerability; Systemic risk; Systemic risk capital; Financial markets; Banks

References

  • Deciphering the liquidity and credit crunch 2007‐2008
    Brunnermeier, M.
  • Systemic risk in modern financial systems: analytics and policy design
    Gai, P.; Jenkinson, N.; Kapadia, S.
  • Amplification mechanisms in liquidity crises
    Krishnamurthy, A.
  • Financial networks: contagion, commitment, and private sector bailouts
    Leitner, Y.
  • Network models and financial stability
    Nier, E.; Yang, J.; Yorulmazer, T.; Alentorn, A.

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