[P2P-F] Fw: [gang8] interbank settlement etc.

Wed Sep 26 12:04:21 CEST 2012

----- Forwarded Message -----
From: Geoffrey Gardiner <geoffrey.gardiner at btinternet.com>
To: gang8 at yahoogroups.com 
Sent: Wednesday, 26 September 2012, 8:53
Subject: Re: [gang8] interbank settlement etc.

What one would expect, or course, but certainly food for thought. 

For every credit there is a debit so is the problem that more and more lending institutions are relying on short term funds from other institutions (who have too much) when what they need is long-term deposits direct from the public? Equally one could say that banks should not hold government bonds; governments should fund themselves from the public directly. 

Is there too much intermediation, or is too much intermediation short term? Japan had the excellent Loan Trust system and other countries have equivalents, but the Anglo-Saxons never developed such practices, in the case of Britain because in the 19th century the building society movement had been allowed to develop on the basis of one month money lent for 20 years, which by 1970s had become one day money lent for 25 years. Any liquidity problem a BSoc had was dealt with by its banker, one of the then big five in most cases, as they had no link to the money market, not being members of the London Clearing House. So the BSocs were disciplined by their bankers. Opening up the money market to anyone may have started the rot.

Any comment?

Geoff

From: Prof. Richard Werner 
Sent: Thursday, September 06, 2012 9:27 AM
To: gang8 at yahoogroups.com 
Subject: [gang8] interbank settlement etc.

Dear All,
Robert Fischer wants to draw our attention to three articles about the web of interbank connections, and implications, namely
1. Stefano Battiston et al. in Nature (Aug 2012): 

DebtRank: Too Central to Fail? Financial Networks, the FED and Systemic Risk

               Abstract
Systemic risk, here meant as the risk of default of a large portion of the financial system, depends on the network of financial exposures among institutions. However, there is no widely accepted methodology to determine the systemically important nodes in a network. To fill this gap, we introduce, DebtRank, a novel measure of systemic impact inspired by feedback-centrality. As an application, we analyse a new and unique dataset on the USD 1.2 trillion FED emergency loans program to global financial institutions during 2008–2010. We find that a group of 22 institutions, which received most of the funds, form a strongly connected graph where each of the nodes becomes systemically important at the peak of the crisis. Moreover, a systemic default could have been triggered even by small dispersed shocks. The results suggest that the debate on too-big-to-fail institutions should include the even more serious issue of too-central-to-fail.

Source: http://www.nature.com/srep/2012/120802/srep00541/full/srep00541.html

2. Working paper Nr 321 of the Bank of England:
On which he comments:  “an interesting thought, IMHO related with the work of Stefano Battiston et al.;  i.e. the netting matrix for bank systems (see page 11). On page 17 there is an important math formula regarding netting ratio between interbank and centrally settled banking networks: 
A-network:  That means correspondent banking, i.e. Transactions in system between “n” international banks without Central Bank, (I call that decentral netting or clearing) 

B-network:  Transaction of  “n” Banks with a clearing center (I call that central netting or clearing) 
Theoretically the netting ratio of an A-Network of “n” Banks is sqrt(n-1) times larger then in a  B-network. In other words:  In case of a  global systemic crisis, the “n” banks interconnected in the  A-network  would need theoretically sqrt(n-1) times more central bank money for the the settlement of their open net debit-credit-positions then in a B-Network. Nota bene: Actually the unsettled debit-credit positions of “our” worldwide  A-network  mount to 21 Trillion (10^12) $. (See BIS, quarterly review)

3.  Stefania Vitali, James B. Glattfelder and Stefano Battiston
The network of global corporate control

Abstract
The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions.
This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.
The paper is available at: http://arxiv.org/pdf/1107.5728v2.pdfor http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0025995

Thanks Robert for passing these on with your comments.
Warm regards,
Richard
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