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Updated: May 30, 2026
05:37
An R-Based Landscape Validation of a Competing Risk Model
Published on: September 16, 2022
Individual versus systemic risk and the Regulator's Dilemma
Nicholas Beale1, David G Rand, Heather Battey
1Sciteb, London W1B 4BD, United Kingdom.
Summary
Financial regulators face a challenge: banks diversifying risks can increase systemic failure. Promoting diverse diversification can enhance financial system stability and reduce capital requirements.
Area of Science:
- Financial economics
- Systemic risk management
- Regulatory policy
Background:
- The 2007-2009 global financial crisis highlighted systemic weaknesses.
- Systemic regulation, focusing on the entire financial system, is crucial for reform.
- Individual bank risk diversification can inadvertently increase systemic vulnerability.
Purpose of the Study:
- To analyze the tension between individual bank asset diversification and overall financial system stability.
- To identify key parameters influencing the systemic cost of multiple bank failures.
- To explore regulatory interventions for promoting financial system resilience.
Main Methods:
- Modeling financial systems to assess the impact of correlated diversification strategies.
- Quantifying systemic costs based on risk exposure and diversity parameters.
- Analyzing the relationship between individual actor risk profiles and system-wide stability.
Main Results:
- Systemic cost of multiple failures is primarily driven by global risk exposure and diversity.
- Similar diversification strategies across many banks can paradoxically increase simultaneous failure probability.
- Individual bank risk profiles can be used to assess system-level stability.
Conclusions:
- Regulatory intervention incentivizing diverse diversification among banks can enhance systemic stability.
- Promoting diversification heterogeneity offers a new tool for regulators.
- Potential for improved system stability with reduced capital requirements through targeted regulation.
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