Abstract

http://ssrn.com/abstract=1497973
 
 

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The Risk Externalities of Too Big to Fail


Nassim Nicholas Taleb


New York University-Poly School of Engineering

Charles S. Tapiero


NYU Poly - Department of Finance and Risk Engineering

November 1, 2009

Physica A: Statistical Mechanics and its Applications 389 (17), 3503-3507

Abstract:     
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

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Date posted: November 1, 2009 ; Last revised: February 15, 2014

Suggested Citation

Taleb, Nassim Nicholas and Tapiero, Charles S., The Risk Externalities of Too Big to Fail (November 1, 2009). Physica A: Statistical Mechanics and its Applications 389 (17), 3503-3507. Available at SSRN: http://ssrn.com/abstract=1497973 or http://dx.doi.org/10.2139/ssrn.1497973

Contact Information

Nassim Nicholas Taleb (Contact Author)
New York University-Poly School of Engineering ( email )
Brooklyn, NY 11201
United States

Charles S. Tapiero
NYU Poly - Department of Finance and Risk Engineering ( email )
Brooklyn, NY 11201
United States
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