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Reports Summarize Statistical Physics Findings from University of London (Systemic Losses Due to Counterparty Risk in a Stylized Banking System)

August 19, 2014



By a News Reporter-Staff News Editor at Physics Week -- Research findings on Statistical Physics are discussed in a new report. According to news reporting from London, United Kingdom, by VerticalNews journalists, research stated, "We report a study of a stylized banking cascade model investigating systemic risk caused by counterparty failure using liabilities and assets to define banks' balance sheet. In our stylized system, banks can be in two states: normally operating or distressed and the state of a bank changes from normally operating to distressed whenever its liabilities are larger than the banks' assets."

The news correspondents obtained a quote from the research from the University of London, "The banks are connected through an interbank lending network and, whenever a bank is distressed, its creditor cannot expect the loan from the distressed bank to be repaid, potentially becoming distressed themselves. We solve the problem analytically for a homogeneous system and test the robustness and generality of the results with simulations of more complex systems. We investigate the parameter space and the corresponding distribution of operating banks mapping the conditions under which the whole system is stable or unstable. This allows us to determine how financial stability of a banking system is influenced by regulatory decisions, such as leverage; we discuss the effect of central bank actions, such as quantitative easing and we determine the cost of rescuing a distressed banking system using re-capitalisation."

According to the news reporters, the research concluded: "Finally, we estimate the stability of the UK and US banking systems comparing the years 2007 and 2012 by using real data."

For more information on this research see: Systemic Losses Due to Counterparty Risk in a Stylized Banking System. Journal of Statistical Physics, 2014;156(5):998-1024. Journal of Statistical Physics can be contacted at: Springer, 233 Spring St, New York, NY 10013, USA. (Springer - www.springer.com; Journal of Statistical Physics - www.springerlink.com/content/0022-4715/)

Our news journalists report that additional information may be obtained by contacting A. Birch, University of London, Syst Risk Center, London WC2A 2AE, United Kingdom.

Keywords for this news article include: London, Europe, United Kingdom, Statistical Physics

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Source: Physics Week


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