This talk provides a broad overview of what has been learned from 11 years of intensive financial systemic risk research since the Great Financial Crisis. Overall, we now understand more clearly that no narrow view of systemic risk can provide a convincing story that says the system is resilient. Central banking regulators now take systemic risk so seriously that a great burden of additional regulation has been placed on banks to make sure they do not become unduly systemically risky. It is therefore important that all banks, not just central banks, develop models of systemic risk to understand the rationale for this burden. One conceptual breakthrough is the identification of a wide range of different mechanisms through which the behaviour of any bank when stressed can send dangerous shocks to its counterparty banks. While in principle such mechanisms can be combined into large scale simulation models for different systems, the reality is that the required databases are typically just not available. An interesting development on the theory side is using percolation on networks as a basis for understanding financial contagion. Looking to the future, one can discern important risks, notably the dangers of cross border spillovers and FX effects, that have not yet been well-studied by SR modelers.

Towards the end of the talk, I will briefly describe my recent efforts to create a unified framework for analyzing the global financial system. After discussing a number of simplifying assumptions, I propose a class of models called Inhomogeneous Random Financial Networks and discuss some of the hurdles to jump before such a framework can be useful in practice.

Bio

Tom Hurd is Professor of Mathematics at McMaster University. He turned to the mathematical study of financial markets in the late 1990s, following his earlier research in mathematical physics. Since then he has written on a wide range of financial topics, with publications in portfolio theory, interest rate modeling, and credit risk. Over the past few years, his work has focussed on the mathematical modeling of systemic risk, that is, the stability of financial networks. A founder of the M-Phimac Master program in Financial Mathematics at McMaster, which he continues to direct, he is currently also one of the three leaders of the CQAM Systemic Risk Analytics Lab.