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Oec. Magazin 2

«We are not politi- cians, but scientists. Our goal is to build a framework that can enrich the toolbox used by national banks and the ECB» Prof. Dr. Stefano Battiston Walk into Stefano Battiston’s office and the chart on the 42 year old Italian’s screen suggests you’ve strayed into genealogy, not banking and finance. Displayed is what looks like a family tree, with sprawling links from one to a number, and then dozens, of components. Rather than ancestry, it is the devilishly com- plicated interconnections between members of the world’s financial system that occupy Battis- ton’s time. A physicist by training (apart from a brief excursion into neuroscience), he switched to economics and finance about 15 years ago, roughly the last half of which have been in Zurich. «What is systemic risk in finance?» he asks. «There’s no consensus on the definition, but what we’re talking about is the risk of a collapse of a large part of the financial system, and the impact on the real economy. That means under- standing the nature and structure of the inter-re- lationships between participants. And the last part is crucial, as finance and economics are in- creasingly interdependent.» Just take recent history You don’t have to look back far to find a devasta- ting example. Early in the financial crisis, with prices for US mortgage backed securities in free- fall, some bankers still believed the catastrophe might be averted. Experience, of course, showed otherwise, as contagion spread exponentially and the real economy – not just in the US, but virtually worldwide – suffered. Battiston’s focus is on the variables to be tracked to understand such interconnections, and to devise models with some predictive power. «Many actors and entities are involved, not just banks and other financial institutions, but also so Zurich’s systemic risk man Understanding the links between different participants in the financial system has become crucial to assessing and supervising banks and other market players to avoid a future crisis. But unearthing, let alone tracking, such complex inter-relationships is easier said than done. Haig Simonian called non bank credit institutions (participants extending credit but not regulated like banks). Then there are companies, households, regula- tors and so on. Then come different asset classes, all of which have their own price dynamics and impacts on individual participants.» The asset classes include not just the mortga- ge backed securities at the root of the 2007 crisis, but others, from classic credits to derivatives and all manner of additional products. Equity also plays a part, especially cross holdings between fi- nancial institutions. «The initial shock to the financial system im- mediately gets amplified by all the inter-depen- dencies, explaining why we care so much about network effects. These can be very substantial, multiplying the initial shock by two, three or four times.» The impact of amplification Put simply, Battiston’s research shows a crisis in one market, or involving one participant, can be much more serious than might be expected, be- cause markets, and participants, are so closely intertwined. And it suggests size alone (Too Big To Fail) is not the exclusive criterion to warrant regulators’ concern. Leverage and the degree of interconnectivity are the two drivers. Difficulties at a bank that is highly dependent on the interbank market for funding, for example, can have a much bigger impact than problems at one financed primarily by customer deposits. «You don’t just get a chain reaction, but compounding. Because you have so many different agents, there are externalities.» What takes Battiston’s research into the realm of big data is not so much the quantity of infor- Fokus 18 Oec. Dezember 2014