ETH Zurich

www.sg.ethz.ch

Too Complex to Fail

Concentration and Complexity in Financial Networks
Stefano Battiston
Towards a Sustainable Financial System, Stockholm
September 12, 2013

Stefano Battiston
Too Complex to Fail

ETH Zurich
Acknowledgments

www.sg.ethz.ch

Acknowledgments
SNF-Professorship on Financial Networks and Systemic risk
Institute of Banking and Finance, UZH (from Fall 2013)

FOC: Forecasting Financial Crises - EU Project FET-OPEN

(2010-2013).
Coord. G. Caldarelli (IMT Lucca), 14 partners, including ECB

SIMPOL: Financial Systems Simulation and Policy Modeling - EU

Project FET-OPEN (2013-2015)
Coord. S. Battiston - Financial networks modeling, Crowd-sourcing:
engaging people in mapping influence

INET (Inst. of New Econ. Thinking) - Finan. Stability Program,

coord. J. Stiglitz (Columbia Univ.).
Activity on Financial Networks, chaired A. Haldane (BoE)

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Outline

www.sg.ethz.ch

Outline of the talk

Towards a sustainable financial

system: key dimensions
Interdependence

Complexity

0.9
0.8

Concentration
DebtRank

Notion of economic value.

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Towards a Sustainable Financial System, Stockholm

200

400
600
Time (days)

800

September 12, 2013

1000

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Interdependence

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Interdependence

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Interdependence

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Interdependence

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Balance Sheet Interlock and Distress Propagation

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Balance Sheet Interlock and Distress Propagation

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Balance Sheet Interlock and Distress Propagation

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Interdependence

www.sg.ethz.ch

Comovements among CDS

Nodes:
institutions with
traded CDS
Links:
significant
co-movements
between spreads.

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Complexity

www.sg.ethz.ch

Complexity

Complex
Instruments,
e.g. derivatives
Complex network
of contracts

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Complexity

www.sg.ethz.ch

Complexity
Probability of default are interdependent: determination of
equilibrium can be not easy

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Complexity

www.sg.ethz.ch

Complexity
Probability of default are interdependent: determination of
equilibrium can be not easy

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

Concentration

Concentration: how many relevant market players in the game.

1

Risk is more concentrated. Fewer egg baskets.

Higher chances of market power.

High concentration and strong interdependence together:

1

Higher systemic risk (a single big player can affect other big ones)

Higher risk of regulatory capture (big players share economic

interests, no collusion)

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

The Corporate Network

Equity ownership ties:
influence and information

Corporation
Stock

Debt
Loans

Treasury shares
Outstanding shares
(Preferred shares)

1% of the actors: 80% of

influence
100 financial firms: 40%
of influence.

elect
Bonds

cashflow rights
voting rights

Stockholders

Towards a Sustainable Financial System, Stockholm

Manage
ment

Board
of
Directors

Employees

40 thousand TNC, 1
million actors

cashflow rights

ct
ele

Investors

Banks

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

The Corporate Network

Equity ownership ties:
influence and information
40 thousand TNC, 1
million actors
1% of the actors: 80% of
influence
100 financial firms: 40%
of influence.

Towards a Sustainable Financial System, Stockholm

September 12, 2013

10 / 17

Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

The Corporate Network

Equity ownership ties:
influence and information
40 thousand TNC, 1
million actors
1% of the actors: 80% of
influence
100 financial firms: 40%
of influence.

Towards a Sustainable Financial System, Stockholm

September 12, 2013

10 / 17

Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

The Corporate Network

Equity ownership ties:
influence and information
40 thousand TNC, 1
million actors
1% of the actors: 80% of
influence
100 financial firms: 40%
of influence.

Towards a Sustainable Financial System, Stockholm

September 12, 2013

10 / 17

Stefano Battiston
Too Complex to Fail

Towards a Sustainable Financial System, Stockholm

ETH Zurich
Concentration

www.sg.ethz.ch

September 12, 2013

11 / 17

Stefano Battiston
Too Complex to Fail

Towards a Sustainable Financial System, Stockholm

ETH Zurich
Concentration

www.sg.ethz.ch

September 12, 2013

11 / 17

Stefano Battiston
Too Complex to Fail

Towards a Sustainable Financial System, Stockholm

ETH Zurich
Concentration

www.sg.ethz.ch

September 12, 2013

11 / 17

Stefano Battiston
Too Complex to Fail

Towards a Sustainable Financial System, Stockholm

ETH Zurich
Concentration

www.sg.ethz.ch

September 12, 2013

11 / 17

Stefano Battiston
Too Complex to Fail

Towards a Sustainable Financial System, Stockholm

ETH Zurich
Concentration

www.sg.ethz.ch

September 12, 2013

11 / 17

Stefano Battiston
Too Complex to Fail

Towards a Sustainable Financial System, Stockholm

ETH Zurich
Concentration

www.sg.ethz.ch

September 12, 2013

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Stefano Battiston
Too Complex to Fail

0.25

ETH Zurich
Concentration

www.sg.ethz.ch

BOA
JPM

0.2

Debt Rank

CITIGROUP
BARCLAYS
RBS

0.15
WELLS FARGO

DEUTSCHE BANK

0.1

0.05

0
2

9
UBS
WACHOVIA
GSACHS
HBOS
CREDIT SUISSE
90 b
UNICREDITO
MERRILL LYNCH
Debt
FORTIS
MORGAN STANLEY
MITSUBISHI UFJ
10 b
SOCGEN
BNP
COMMERZBANK
Fragility
DEXIA
NATIXIS

Towards a Sustainable Financial System, Stockholm

5
6
7
Relative asset size (%)

6
3

10

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

9
90 b

0.3

BOA

10 b

JPM

0.25
Debt Rank

CITIGROUP

0.2
0.15

RBS
WELLS FARGO

Debt

Fragility

BARCLAYS

DEUTSCHE BANK
CREDIT SUISSE
GSACHS
HBOS
UBS
UNICREDITO
MERRILL LYNCH
FORTIS
MORGAN STANLEY
MITSUBISHI UFJ
SOCGEN
BNP
COMMERZBANK
DEXIA
NATIXIS

WACHOVIA

0.1
0.05
0
2

Towards a Sustainable Financial System, Stockholm

5
6
7
Relative asset size (%)

10

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

0.9
BOA
BARCLAYS

0.8
RBS

Debt Rank

0.7
0.6

WELLS FARGO
WACHOVIA

CITIGROUP

JPM
DEUTSCHE BANK

HBOS

CREDIT SUISSE
UBS

GSACHS

0.5
0.4
0.3

UNICREDITO
MERRILL LYNCH
MORGAN STANLEY
SOCGEN
FORTIS
COMMERZBANK

MITSUBISHI UFJ

9
6
90 b

BNP

DEXIA

Debt

0.2

10 b

0.1
2

NATIXIS

Towards a Sustainable Financial System, Stockholm

5
6
7
Relative asset size (%)

Fragility
9

10

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

0.9
0.8
0.7

WELLS FARGO

BOA
JPM
RBS BARCLAYS

CITIGROUP

DEUTSCHE BANK
HBOS
CREDIT SUISSE
GSACHS
UBS
UNICREDITO
MERRILL LYNCH
MITSUBISHI UFJ
MORGAN STANLEY
SOCGEN
9
FORTIS
90
b
BNP
COMMERZBANK
6
DEXIA
Debt

Debt Rank

0.6 WACHOVIA
0.5
0.4
0.3
0.2

10 b

0.1 NATIXIS
0
2

Fragility

Towards a Sustainable Financial System, Stockholm

5
6
7
Relative asset size (%)

10

September 12, 2013

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Stefano Battiston
Too Complex to Fail

0.9

www.sg.ethz.ch

BOA
WELLS FARGO

0.8

ETH Zurich
Concentration

HBOS

CITIGROUP

JPM

RBS BARCLAYS
CREDIT SUISSE
UNICREDITO
GSACHS
DEUTSCHE BANK
MERRILL LYNCH
FORTIS
SOCGEN
MITSUBISHI UFJ
COMMERZBANK
UBS

WACHOVIA

Debt Rank

0.7
0.6

MORGAN STANLEY

0.5

DEXIA
BNP

0.4

0.3

90 b

0.1
2

Debt

0.2 NATIXIS

10 b

Towards a Sustainable Financial System, Stockholm

5
6
7
Relative asset size (%)

Fragility
9

10

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

0.4
BOA

0.35

JPM

Debt Rank

0.3
0.25
0.2
0.15
0.1
0.05
0
2

BARCLAYS

CITIGROUP

WELLS FARGO
RBS

DEUTSCHE BANK

9
CREDIT SUISSE
WACHOVIA
90 b
MERRILL LYNCH
GSACHS
UBS
HBOS
UNICREDITO
Debt
FORTIS
MORGAN STANLEY
MITSUBISHI UFJ
10 b
SOCGEN
BNP
COMMERZBANK
Fragility
DEXIA
NATIXIS

Towards a Sustainable Financial System, Stockholm

5
6
7
Relative asset size (%)

6
3

10

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

Interplay
When interdependence, complexity and concentration are so high:
AS IF we had one international mega-bank, or not?

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

Interplay
When interdependence, complexity and concentration are so high:
AS IF we had one international mega-bank, or not?

Risks
Regulatory capture
Systemic distress
Social divide

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

The Notion of Economic Value

Economic value: a social norm.

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

The Notion of Economic Value

Economic value: a social norm.

Investment decisions: where is drive to sustainability?

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

Conclusions

Scientific work on financial networks and systemic risk: problems

may have deeper roots than we tend to think.
Seems good to reduce concentration, interdependence and
complexity, together.
Proposals to reform bank organization could be examined in this
light.
At the same time: a serious effort to extending the notion of
economic value.

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

Related International Activities

SIMPOL (Financial Systems Simulation and Policy Modeling)

FOC (Forecasting Financial Crises)
GSS (Global Systems Science)
GSDP Global Systems and Policies
INET - Systemic Risk Task Force: WG Fin. Nets
MULTIPLEX (Theory of networks of networks)

Towards a Sustainable Financial System, Stockholm

September 12, 2013

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Stefano Battiston
Too Complex to Fail

ETH Zurich
Concentration

www.sg.ethz.ch

References

Debtrank: [Battiston, Puliga, Kaushik, Tasca, Caldarelli, DebtRank:

Too-central-to-fail? (2012) Sci. Rep. 2:541]
Complex derivatives [ Battiston, Caldarelli, Georg, May, Stiglitz, Nat. Phys., 2013]
CDS and network reconstruction [Kaushik R., Battiston S., 2013 PLoS-ONE, forth],
[Puliga M., Kaushik R., Battiston S., Caldarelli G., 2013 in progress]
Estimation of systemic risk in networks from partial information: [Musmeci, Puliga,
Gabrielli, Battiston, Caldarelli, JOSS 2013, forth.]
Controllability in e-mid [Delpini, Battiston, Riccaboni, Pammolli, Gabbi, Caldarelli,
Sci. Rep., 2013, forth.]
Controllability in TARGET2 [Galbiati, Delpini, Battiston, (2013) Nat Phys]

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