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The Dynamics of Financial Stability
Year Of Publication: 2011
Month Of Publication: March
Pages: 7
Download Count: 15
View Count: 1396
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 3-4-2011
Publisher: Administrator
Summary
The social role of any company is to get the maximum profitability with the less risk. Due to Basel III, banks should now raise their minimum capital levels on an individual basis, with the aim of lowering the probability for a large crash to occur. Such implementation assumes that with higher minimum capital levels it becomes more probable that the value of the assets drop bellow the minimum level and consequently expects the number of bank defaults to drop also. We present evidence that in such new financial reality large crashes are avoid only if one assumes that banks will accept quietly the drop of business levels, which is counter-nature. Our perspective steams from statistical physics and gives hints for improving bank system resilience. Stock markets exhibit critical behavior and scaling features, showing a power-law for the amplitude of financial crisis. By modeling a financial network where critical behavior naturally emerges it is possible to show that bank system resilience is not favored by raising the levels of capital. Due to the complex nature of the financial network, only the probability of bank default is affected
Author(s)
da Cruz, Joao P. Sign in to follow this author
Lind, Pedro G. Sign in to follow this author
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