The Risk Externalities of Too Big to Fail
Nassim Nicholas Taleb
Independent Researcher; NYU-Poly Institute; New England Complex Systems Institute
Charles S. Tapiero
NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering
November 1, 2009
Physica A: Statistical Mechanics and its Applications 389 (17), 3503-3507
This paper examines the risk externalities stemming from the size of institutions. Assuming (conservatively) that a firm risk exposure is limited to its capital while its external (and random) losses are unbounded we establish a condition for a firm to be too big to fail. In particular, expected risk externalities’ losses conditions for positive first and second derivatives with respect to the firm capital are derived. Examples and analytical results are obtained based on firms’ random effects on their external losses (their risk externalities) and policy implications are drawn that assess both the effects of “too big to fail firms” and their regulation.
Number of Pages in PDF File: 8
Keywords: banking crisis, risk management, too big to fail
JEL Classification: D8, G11, G12, G13, N00
Date posted: November 1, 2009 ; Last revised: February 15, 2014
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