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SUMMARY:Efficiency and Stability of a Financial Architecture with Too-Inte
 rconnected-to-Fail Institutions - Gofman\, M (University of Wisconsin-Madi
 son)
DTSTART:20140828T133000Z
DTEND:20140828T140000Z
UID:TALK53919@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:How to regulate large interconnected financial institutions ha
 s become a key policy question. To make the financial architecture more st
 able regulators have proposed to limit the size and connections of these i
 nstitutions. I calibrate a network-based model of an over-the-counter mark
 et and infer the hidden financial architecture based on bilateral trades i
 n the Federal funds market. A comparison of the calibrated architecture to
  nine counterfactual architectures reveals that that efficiency of liquidi
 ty allocation decreases and the risk of endogenous contagion increases non
 -monotonically as banks face limits on the number of trading partners. I a
 lso find that in a less concentrated architecture more banks trigger a lar
 ge cascade of failures\, and it is more difficult to identify these banks 
 ex-ante. Overall\, my results suggest it is not optimal to restrict the nu
 mber of connections of too-interconnected-to-fail banks because it can res
 ult in a financial architecture that is less efficient\, more fragile\, an
 d harder to monitor.\n
LOCATION:Seminar Room 1\, Newton Institute
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