Search Results
Showing results 1 to 7 of approximately 7.
(refine search)
Working Paper
Differences of Opinions
This paper presents a generalization of the DeGroot learning rule in which social learning can lead to polarization, even for connected networks. I first develop a model of biased assimilation in which the utility an agent receives from past decisions depends on current beliefs when uncertainty is slow to resolve. I use this model to motivate key features of an agent?s optimization problem subject to scarce private information, which forces the agent to extrapolate using social information. Even when the agent extrapolates under ?scientific? assumptions and all individuals in the network ...
Report
Which bank is the \\"central\\" bank? an application of Markov theory to the Canadian Large Value Transfer System
Recently, economists have argued that a bank's importance within the financial system depends not only on its individual characteristics but also on its position within the banking network. A bank is deemed to be "central" if, based on our network analysis, it is predicted to hold the most liquidity. In this paper, we use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). In doing so, we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for ...
Discussion Paper
Monitoring Banks’ Exposure to Nonbanks: The Network of Interconnections Matters
The first post in this series discussed the potential exposure of banks to the open-end funds sector, by virtue of commonalities in asset holdings that expose banks to balance sheet losses in the event of an asset fire sale by these funds. In this post, we summarize the findings reported in a recent paper of ours, in which we expand the analysis to consider a broad cross section of non-bank financial institution (NBFI) segments. We unveil an innovative monitoring insight: the network of interconnections across NBFI segments and banks matters. For example, certain nonbank institutions may not ...
Report
Congestion and cascades in payment systems
We develop a parsimonious model of the interbank payment system to study congestion and the role of liquidity markets in alleviating congestion. The model incorporates an endogenous instruction arrival process, scale-free topology of payments between banks, fixed total liquidity that limits banks' capacity to process arriving instructions, and a global market that distributes liquidity. We find that at low liquidity, the system becomes congested and payment settlement loses correlation with payment instruction arrival, becoming coupled across the network. The onset of congestion is evidently ...
Report
Non-Bank Financial Institutions and Banks’ Fire-Sale Vulnerabilities
Banks carry significant exposures to nonbanks from direct dealings, but they can also be exposed, indirectly, through losses in asset values resulting from fire-sale events. We assess the vulnerability of U.S. banks to fire sales potentially originating from any of twelve separate nonbank segments and identify network-like externalities driven by the interconnectedness across nonbank types in terms of asset holdings. We document that such network externalities can contribute to very large multiples of an original fire sale, thus suggesting that conventional assessments of fire-sale ...
Report
Barriers to network-specific innovation
We examine incentives for network-specific investment and the implications for network governance. We model an environment in which participants that make payments over a network can invest in a technology that reduces the marginal cost of using the network. A network effect results in multiple equilibria; either all agents invest and network usage is high or no agents invest and network usage is low. When commitment is feasible, the high-use equilibrium can be implemented; however, when commitment is infeasible, fixed costs associated with use of the network-specific technology result in a ...