Banking Regulation and Network-Topology Dependence of Iterative Risk-Trading Games

21 Pages Posted: 22 Mar 2002

See all articles by Rudolf Hanel

Rudolf Hanel

University of Vienna - Department of Biomedical Engineering and Physics

Stefan Thurner

Institute for Science of Complex Systems, Medical University of Vienna; Santa Fe Institute

Stefan Pichler

WU - Vienna University of Economics and Business - Department of Finance, Accounting and Statistics; VGSF (Vienna Graduate School of Finance)

Date Written: February 2002

Abstract

In the context of understanding risk-regulatory behavior of financial institutions we propose a general dynamical game between several agents who pick their trading strategies depending on their individual risk-to-wealth ratio. The game is studied numerically for different network topologies. Consequences of topology are shown for the wealth time-series of agents, for the safety and efficiency of various types of networks. The model yields realistic-looking time-series of wealth and the cost of safety increases as a power-like function. The relevant model parameters should be controllable in reality. This setup allows a stringent analysis of the effects of different approaches of banking regulation as currently suggested by the Basle Committee of Banking Supervision. We find evidence that a tightening of the current regulatory framework does not necessarily lead to an improvement of the safety of the banking system. Moreover, the potential impact of catastrophic events like September 11, 2001, on the financial system can be measured within this framework.

Keywords: Banking Regulation, Bank Default, Network-topology Dependence, Risk-trading Game, Dynamic Decision Making Process

JEL Classification: C73, G28

Suggested Citation

Hanel, Rudolf and Thurner, Stefan and Pichler, Stefan, Banking Regulation and Network-Topology Dependence of Iterative Risk-Trading Games (February 2002). Available at SSRN: https://ssrn.com/abstract=302790 or http://dx.doi.org/10.2139/ssrn.302790

Rudolf Hanel

University of Vienna - Department of Biomedical Engineering and Physics ( email )

Waehringer Guertel 18-20
Vienna, A-1090
Austria

Stefan Thurner

Institute for Science of Complex Systems, Medical University of Vienna ( email )

Spitalgasse 23
Vienna, A-1090
Austria

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Stefan Pichler (Contact Author)

WU - Vienna University of Economics and Business - Department of Finance, Accounting and Statistics ( email )

Heiligenstaedter Strasse 46-48
Wien 1190
Austria

VGSF (Vienna Graduate School of Finance) ( email )

Heiligenstaedter Strasse 46-48
Vienna, 1190
Austria

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