{
  "title": "IMF Survey : Financial Networks Key to Understanding Systemic Risk",
  "publication": "IMF News, May 28, 2014",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sores052314a",
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  "summary": "With financial markets around the world so interconnected, the analysis of “networks” in the financial system would help deepen understanding of systemic risk and is key to preventing future financial crises, say leading researchers and policymakers at a Research conference.",
  "authors": [
    "Camelia Minoiu",
    "Sanjay Sharma May"
  ],
  "publishDate": "2014-05-28",
  "sections": [
    {
      "heading": "Network perspective and motivation",
      "content": "- Financial markets are highly interconnected; analyzing “networks” in the financial system helps deepen understanding of systemic risk and is key to preventing future financial crises.\n- Financial transactions create a “financial network”; understanding how these networks function and how robust they are is critical to establishing rules to manage systemic risk.\n- The global financial crisis highlighted contagion and systemic risk driven by interconnectedness of economic agents."
    },
    {
      "heading": "Conference overview (Interconnectedness: Building Bridges between Research and Policy)",
      "content": "- Publication date: May 28, 2014.\n- Conference held on May 8-9, 2014; jointly organized by the IMF’s Research Department and the Monetary and Capital Markets Department in collaboration with the Institute for New Economic Thinking and the Deutsche Bundesbank.\n- Key questions addressed:\n  - Why are some financial networks more stable than others?\n  - What is the link between the structure of a network and contagion?\n  - What are the advantages of a high degree of interconnectedness for individual institutions?\n  - Is there a trade-off between network resilience to shocks and social welfare?"
    },
    {
      "heading": "Major findings from speakers and panels",
      "content": "- Joseph Stiglitz (keynote)\n  - Before the 2007–2008 crisis, diversification/interconnectedness was viewed positively; the crisis showed that high interconnectedness “facilitated the breakdown” and became “part of the problem.”\n  - There is no single optimal financial architecture; systemic risk depends on the interplay of architecture with capital buffers, asset market liquidity, correlations, and the nature of shocks.\n  - “An architecture that might work well under one circumstance might not work well in another.”\n  - A network that evolves on its own should not be presumed socially efficient.\n  - Banks can be “too interconnected, too central, and too correlated to fail” in addition to being too big to fail—creating moral hazard concerns.\n  - Interconnectedness spans linkages within the financial sector and between the financial sector and the real economy; bankruptcies can have real costs, as in the 1997–98 East Asian crisis.\n  - Policy prescription: limit interconnectedness and foster “a richer diversity of financial institutions” to reduce too-correlated-to-fail structures and improve resilience.\n\n- Claudia Buch (Deutsche Bundesbank)\n  - Indirect financial linkages (common exposures and business models) matter significantly.\n  - Empirical research is insufficiently guided by theory; pragmatic use of existing datasets with a common methodology is recommended.\n\n- Sujit Kapadia (Bank of England)\n  - Future research should focus on real world network structures and core institutions at the center of networks.\n  - Important indirect channels include liquidity risk (banks withdrawing funding from each other), fire sales, and fear-driven contagion linked to uncertainty.\n  - Focusing on counterparty risk and defaults alone is insufficient because contagion and externalities often occur before default.\n\n- Nellie Liang (Federal Reserve Board)\n  - Systemic risk can generate real economy costs before defaults occur and is often procyclical.\n  - Key research areas include:\n    - Whether interconnectedness can generate systemic risk without excessive leverage or maturity transformation.\n    - How to expand network analyses of the federal funds market to the multi-trillion dollar derivatives markets.\n    - How much information about individual institutions should be disclosed after stress tests.\n    - How to identify non-bank systemically important financial institutions (SIFI).\n  - Policy question: “How do we incorporate interconnectedness into stress tests?”\n\n- Patricia Mosser (Office of Financial Research)\n  - Research should focus on wholesale funding markets.\n  - Global SIFIs will take time before they can report counterparty risk data comparably across institutions.\n  - Creating data platforms and using “innovative technology solutions” to safeguard and analyze data is important.\n\n- Sanjay Sharma (RBC Capital Markets)\n  - Reporting lags (e.g., financial statements) and opaque disclosure documents (e.g., a 500-page disclosure) complicate assessing current risk.\n  - Crisis-era data may be of limited use for predicting the next crisis due to unprecedented government interventions.\n  - Proposed practical solution: implement a universal global codification framework (a barcode system for every financial transaction) to better understand financial flows and exposures."
    },
    {
      "heading": "Methodological and research directions",
      "content": "- Static networks are a useful starting point, but research should incorporate time-varying risk in networks (risk that varies over the business cycle).\n- Empirical work needs stronger links to theory; many panelists called for research on procyclicality of networks and leading vulnerabilities in the financial system.\n- Important to consider indirect channels of contagion and behaviors occurring prior to defaults."
    },
    {
      "heading": "Data gaps and policy-relevant recommendations",
      "content": "- Major obstacle: data gaps, especially on nonbanks, shadow banks, and linkages with the non-core financial system.\n- Specific data challenges: netting, treatment of derivatives, balance sheet items that mask underlying exposures, and comparability of counterparty risk reporting across global SIFIs.\n- Recommendations:\n  - Use existing country datasets with a common methodology as a pragmatic first step.\n  - Build data platforms and employ innovative technology to safeguard and analyze data.\n  - Explore a universal global codification framework (barcode system) for financial transactions as a cost-effective solution to the “data black hole problem.”\n\nSource: IMF Survey : Financial Networks Key to Understanding Systemic Risk, May 28, 2014 (IMF Research conference summary).\n\n---\n\n Content in this bundle\n\n- Indexpdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Research\n- conference\n- See conference agenda\n- Global Financial Stability Report\n- Research at the IMF\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sores052314a"
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    "Authors: Camelia Minoiu, Sanjay Sharma May",
    "Published: May 28, 2014",
    "Financial markets are highly interconnected; analyzing “networks” in the financial system helps deepen understanding of systemic risk and is key to preventing future financial crises.",
    "Financial transactions create a “financial network”; understanding how these networks function and how robust they are is critical to establishing rules to manage systemic risk.",
    "The global financial crisis highlighted contagion and systemic risk driven by interconnectedness of economic agents.",
    "Publication date: May 28, 2014.",
    "Conference held on May 8-9, 2014; jointly organized by the IMF’s Research Department and the Monetary and Capital Markets Department in collaboration with the Institute for New Economic Thinking and the Deutsche Bundesbank.",
    "Key questions addressed:",
    "Joseph Stiglitz (keynote)",
    "Claudia Buch (Deutsche Bundesbank)",
    "Sujit Kapadia (Bank of England)",
    "Nellie Liang (Federal Reserve Board)",
    "Patricia Mosser (Office of Financial Research)",
    "Sanjay Sharma (RBC Capital Markets)",
    "Static networks are a useful starting point, but research should incorporate time-varying risk in networks (risk that varies over the business cycle).",
    "Empirical work needs stronger links to theory; many panelists called for research on procyclicality of networks and leading vulnerabilities in the financial system.",
    "Important to consider indirect channels of contagion and behaviors occurring prior to defaults.",
    "Major obstacle: data gaps, especially on nonbanks, shadow banks, and linkages with the non-core financial system.",
    "Specific data challenges: netting, treatment of derivatives, balance sheet items that mask underlying exposures, and comparability of counterparty risk reporting across global SIFIs.",
    "Recommendations:",
    "[Indexpdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/irb/2014/01/_indexpdf.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[IMF Research](https://www.imf.org/en/news/search)",
    "[conference](http://www.imf.org/external/np/seminars/eng/2014/interconnect/index.htm)",
    "[See conference agenda](http://www.imf.org/external//np/seminars/eng/2014/interconnect/index.htm)",
    "[Global Financial Stability Report](http://www.imf.org/external/pubs/ft/gfsr/index.htm)",
    "[Research at the IMF](http://www.imf.org/external/research/index.aspx)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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