Section: New Results

Systemic risk

Participants : Hamed Amini [EPFL] , Andreea Minca [Cornell University)] , Agnès Sulem, Rui Chen, Romuald Elie.

We study the issue of control of systemic risk in the framework of random graph models. The paper [16] by H. Amini, A. Minca and A. Sulem, provides important insight on the relation between the value of a financial system, connectivity and optimal intervention. More precisely, we consider a core-periphery random financial network in which links lead to the creation of projects in the outside economy but make banks prone to contagion risk. The controller seeks to maximize, under budget constraints, the value of the financial system, defined as the total value of the projects funded. Under partial information on interbank links, revealed in conjunction with the spread of contagion, the optimal control problem is shown to become a Markov decision problem. Our results show that up to a certain connectivity, the value of the financial system increases with connectivity. However, this is no longer the case if connectivity becomes too large. This insight shows that it is far from obvious that connectivity of a core bank should always be brought forward as an argument for priority intervention and it may be sometimes preferable to invest in non-core banks that lend directly to the economy. The natural question remains how to create incentives for the banks to attain an optimal level of connectivity and how to design a guarantee fund that would represent an intervention fund that can be used to maximize the benefits of connectivity. This is under study with the PhD student Rui Chen.

Moreover R. Elie obtained a CVRS PEPS grant on systemic risk modeling with graphs in collaboration with the Inria team COATI and the economic department of Université de Nice.