The Structural Fragility of Financial Systems: Analysis and Modeling Implications for Early Warning Systems

Journal of Risk Finance, 12.4 (2011): 270-290, 2010

Posted: 5 Apr 2013

See all articles by Dieter Gramlich

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW)

Mikhail V. Oet

Federal Reserve Banks - Federal Reserve Bank of Cleveland; Case Western Reserve University - Weatherhead School of Management

Date Written: July 19, 2010

Abstract

Purpose – Lessons from the most recent financial crisis show specific vulnerabilities of financial markets due to weaknesses in the structure of the financial system (structural fragility). As the literature points out, the impact of systemic risk can be closely related to issues of concentration (“too big to fail”) and dependency (“too connected to fail”).

However, different structural variables are emphasized in various ways, and most authors analyze each variable separately. This raises the questions of how structural fragility, as a cause of systemic distress, can be assessed more comprehensively and consistently, and what the implications are for modeling it within an integrated systemic risk framework. This paper seeks to address these issues.

Design/methodology/approach – On the basis of theoretical considerations and in the light of current transformations in financial markets, this paper explores elements of structural fragility and the requirements for modeling them.

Findings – The paper suggests an extended approach for conceptualizing structural fragility, evaluates directions for quantifying structural issues in early warning systems (EWSs) for systemic crises, and lays a theoretical groundwork for further empirical studies.

Originality/value – The need for supervisory actions to prevent crises is urgent, as is the need for integrating structural aspects into EWSs for systemic financial crises. Since a significant aspect of a financial firm's risk comes from outside the firm, individual institutions should understand and monitor the structural aspects of the various risk networks they are in.

Keywords: Financial market vulnerability, Systemic risk, Systemic risk capital, Financial markets, Banks

Suggested Citation

Gramlich, Dieter and Oet, Mikhail V. and Oet, Mikhail V., The Structural Fragility of Financial Systems: Analysis and Modeling Implications for Early Warning Systems (July 19, 2010). Journal of Risk Finance, 12.4 (2011): 270-290, 2010, Available at SSRN: https://ssrn.com/abstract=2244423

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW) ( email )

Lohrtalweg 10
Mosbach, 74821
Germany

Mikhail V. Oet (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216.774.2684 (Phone)
216.579.2932 (Fax)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
357
PlumX Metrics