Tuesday, 2 July 2013

Resilience of Banks and Systems of Banks: A New Approach to Systemic Risks

In the era of globalized economy, it is clear that all corporations, banks and countries form part of a huge system of systems. As turbulence increases and the possibility of shocks and extreme events rises, the importance of a systems perspective of the economy becomes evident.  In fact, due to turbulence, and because the global economy is increasingly fragile, in highly interconnected systems the propagation of stresses and traumas is very fast and can lead to a huge number of possible often surprising outcomes. This number increases with the complexity of the system. However, the idea and concept of “systemic risks”, even though it has become popular during the current economy meltdown, is very difficult to define. By “systemic” we refer of course to anything that can have repercussions (damage, consequences) at system level. For example, the so-called Too-Big-To-Fail companies are thought to be of systemic importance as their collapse could affect the economy severely. The TBTF concept, however, is becoming less significant and a new idea – Too Complex To Survive – is gaining popularity precisely because of what a systems approach can teach us. Since excessive complexity is a formidable source of vulnerability (exposure) and because the global economy is increasingly complex, a systems approach is mandatory. Conventional pre-crisis techniques of risk assessment, management and rating have been conceived in an almost turbulence-free world and are not applicable to the new situation as the current crisis so eloquently demonstrates. This paper illustrates a new approach – based on the quantification of complexity – which is not only applicable to systems as such, it naturally provides measures of their resilience, stability and, most importantly, allows one to better understand their dynamics and functioning. In particular, applications to banks and systems of banks shall be illustrated and discussed.

Download full paper (click on image below)