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Systemic RiskThe Dynamics of Modern Financial Systems$
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Prasanna Gai

Print publication date: 2013

Print ISBN-13: 9780199544493

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199544493.001.0001

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Financial System Resilience

Financial System Resilience

Chapter:
(p.101) 7 Financial System Resilience
Source:
Systemic Risk
Author(s):

Prasanna Gai

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199544493.003.0007

This chapter develops a statistical model for assessing financial system resilience that includes fire sale effects, network effects, and the feedback effects to/from the macroeconomy. An important innovation is that the model can be calibrated with partially available public data on banking sector exposures. The model presents stylized results largely based on data from the Bank for International Settlements in a set-up that is genuinely international—the financial network comprises domestic banks, foreign banks, and domestic firms. The aggregate system loss distributions that emerge are sensible, despite the crude calibration of the feedback effects from curtailed lending in the macroeconomy. The mode, thus, represents a first step in showing how an integrated model of systemic risk that takes complexity and realistic behavioural responses seriously can begin to be developed.

Keywords:   bank stress tests, maximum entropy methods, aggregate loss distribution, real-financial interlinkages, financial networks

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