Title: Strategic financial networks
Authors: Marina Dolfin - King's College London (United Kingdom) [presenting]
Abstract: The aim is to tie the observed dynamics of liquidity allocation of financial intermediaries to the inherent randomness of the structure of the underlying network, as well as to the strategic process of link formation driven by exogenous regulatory policies. The traditional focus of banking supervision is on individual institutions, but liquidity allocation shows the typical features of network-based phenomena in a complex economic environment. In normal times, the highly interconnected system of banks enhances liquidity allocation through interconnectedness and increase risk-sharing whilst, in times of crisis, interconnections lead to amplification of shocks. This property has been called a knife-edge, or robust-yet-fragile. It is worth analyzing which characteristics of complex systems correlate with a high degree of robustness and resilience. Even if there is a wide literature on algorithms designed to generate networks with desired properties, their rules are based on pure chance. This represents a strong limitation when modelling social and economic networks, because of missing incentives to create or delete relationships among actors on the network. The focus is on the dynamical balance between the overall societal welfare and individual incentives, then trying to include incentives in the process of link formation in order to analyse the global network properties that arise, by focussing on robustness and resilience.