Size effect in transitional dynamics of the banking network

Garcia, Alfredo Daniel and Szybisz, Martin Andres (2017): Size effect in transitional dynamics of the banking network.

Abstract

We consider a developed economy banking system, that, when surpass certain size, may destabilize and even enter in chaos. Taking Deposits (D_t), Reserves (R_t), Loans (L_t), the ratio of (R_t) to (D_t) and a parameter γ that weights endogenously the system memory, we analyse stability and the possibility of chaos. Using data for the U.S. between 1960 and 2012 we found that a maximum instability state is verified in 2008 when the crisis hits the U.S. banking system core carrying to a public bailout. A larger system does not necessarily lead to robustness but can expand to greater fragility. A proposed banking system stability indicator is also analysed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking System, Financial Crises, Instability, Systemic Risk
• Subjects: G - Financial Economics > G0 - General > G01 - Financial Crises

References

Allen, F., & Santomero, A. M. (1997). ”The theory of financial intermediation”. Journal of Banking & Finance, 21(11), 1461-1485.

Aulbach, B., & Kieninger, B. (2001). “On three definitions of chaos”. Nonlinear Dyn. Syst. Theory, 1(1), 23-37.

Bagehot, W. (2004). Lombard Street: a description of the money market. Kessinger Publishing, LLC.

Banks, J., Brooks, J., Cairns, G., Davis, G., & Stacey, P. (1992). “On Devaney's definition of chaos”. The American mathematical monthly, 99(4), 332-334.

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). ”Bank concentration, competition, and crises: First results”. Journal of Banking & Finance, 30(5), 1581-1603.

Benhabib, J., & Day, R. H. (1981). “Rational choice and erratic behavior”. The Review of Economic Studies, 48(3), 459-471.

Bernanke, B. S. (2010). Causes of the recent financial and economic crisis. Statement before the Financial Crisis Inquiry Commission, Washington, September, 2.

Board of Governors of the Federal Reserve System for: Reserves of depository institutions, total; not seasonally adjusted, Bank credit, all commercial banks, not seasonally adjusted, http://www.federalreserve.gov/datadownload

Boissay F., Collard F., Smets F. (2013). “Booms and Systemic banking crises”. European Central Bank Working Paper Series, no1514 / February 2013.

Boldrin, M., & Woodford, M. (1990). “Equilibrium models displaying endogenous fluctuations and chaos: a survey”. Journal of Monetary Economics, 25(2), 189-222.

Bullard, J., & Butler, A. (1993). “Nonlinearity and chaos in economic models: implications for policy decisions”. The Economic Journal, 103(419), 849-867.

Bureau of Economic Analysis, Real Gross Domestic Product, Chained Dollars 2005, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1&910=X&911=0&903=6&904=1960&905=2012&906=A

Charlotte Observer (2008). Wachovia faced a ‘silent' bank run, Oct. 02, 2008, http://www.charlotteobserver.com/2008/10/02/226799/wachovia-faced-a-silent-bank-run.html#.UlfyeFPudQI

Cochran, J. P. (2012). Testimony before the Subcommittee on Domestic Monetary Policy and Technology Committee on Financial Services U. S. House of Representatives “ Fractional Reserve Banking and Central Banking as Sources of Economic Instability and banking crises”. National bureau of economic research, (No.w10071).

Cont, R, & Bouchaud, J.P. (2000). “Heard Behavior and Aggregate Fluctuations in Financial Markets” Macroeconomic Dynamics 4, 1469-8056

Diamond, D. W. & Rajan, R. G. (2005). ”Liquidity shortages and banking crises”.The Journal of Finance, 60(2), 615-647.

Eguiluz, V. M., & Zimmermann, M. G. (2000). ”Transmission of information and herd behavior: an application to financial markets”. Physical review letters, 85(26), 5659.

Federal Reserve of Saint Louis/Economic Research for: Consumer Price Index: All Items for the United States (USACPIALLMINMEI), Index 2005=100, Monthly, Not Seasonally Adjusted http://research.stlouisfed.org/fred2

Heijdra, B. J., & Van der Ploeg, F. (2002). Foundations of modern macroeconomics. Oxford University Press.

Fichter Lynn S. (1998). A glossary of terms and concepts associated with non-equilibrium thermodynamic systems (Dissipative Structures, Artificial Life, Chaos, and Complexity). Compiled by the Department of Geology and Environmental Studies James Madison University

Garcia, A. D.; & Nicolini-Llosa, J. L. (2012). “International banks insolvency and Ricardian rent from Texas to Norway”. Royal Economic Society, 2012 Annual Conference Cambridge University; and Reunión Anual Asociación Argentina de Economía Política. (AAEP) 2011. http://www.aaep.org.ar/anales/works/works2011/Garcia.pdf.

Keister, T., & McAndrews, J. (2009). Why are banks holding so many excess reserves?. Current Issues in Economics and Finance, 15(8).

Kumhof, M., & Rancière R. (2010). “Inequality, Leverage and Crises”. International Monetary Fund WP 10/268.

Laeven L., & Valencia F. (2008). ”Systemic banking crises: a new database”. IMF WP/08/224. International Monetary Fund. Retrieved 2008-09-29

Leijonhufvud, A. (2011). “Economics of the Crisis and the Crisis of Economics” Lecture given at the Stockholm School of Economics, September 20, 2011

Leijonhufvud, A. (2013) “Central Banking, Stability and Income Distribution” Lecture given at the University of Cordoba, September 20, 2013

Loepfe, L., Cabrales, A., & Sánchez, A. (2013). Towards a Proper Assignment of Systemic Risk: The Combined Roles of Network Topology and Shock Characteristics. PloS one, 8(10), e77526.

Lorenz, E. N. (1990). “Can chaos and intransitivity lead to interannual variability?”. Tellus A, 42(3), 378-389.

Markeloff, R., Warner, G., & Wollin, E. (2012). Modeling Systemic Risk to the Financial System. The MITRE Corporation.

May, R. M., Levin, S. A., & Sugihara, G. (2008). “Complex systems: Ecology for bankers”. Nature, 451(7181), 893-895.

Nicolini LLosa J. L. (2012). ”Financial Rentiers and Debt Crisis”. Reunión Anual Asociación Argentina de Economía Política (AAEP) 2012. http://www.aaep.org.ar/anales/works/works2012/Nicolini.pdf

Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.

Romer, D. (2006). Advanced Macroeconomics. McGraw Hill, (3rdedition)

Schularick M., Taylor A.M. (2009). “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008”. National Bureau of Economic Research, (No. w15512).

Shone, R. (2002). Economic Dynamics: Phase diagrams and their economic application. Cambridge University Press.

Sordi, S. (1996). Chaos in Macrodynamics: an Excursión through the Literature. Universita degli studi di Siena.

Turner, A. (2009). The Turner Review: A regulatory response to the global banking crisis (Vol. 7). London: Financial Services Authority.

Vitali S., Glattfelder J. B., Battiston, S. (2011). “The Network of Global Corporate Control”. PloS one, 6(10), e25995.

Wright, R. E., & Quadrini, V. (2009). Money and Banking. Flat World Knowledge