Research Seminar by Stathis Tompaidis, Professor and Chair, Department of Finance, Information, Risk & Operations Management, McCombs School of Business, UT Austin.

Title:  Robust Financial Networks

Abstract: We study networks of liabilities between financial institutions that hold portfolios of risky and riskless assets, and introduce the concept of the robust liability network; i.e., the network with the worst expected losses among all networks with the same aggregate liabilities. Given information on each institution’s assets and liabilities, we identify the robust liability network by the conditional gradient method. Using data from publicly available regulatory filings, we calculate the impact of imposing regulatory constraints on different financial institutions, and find that expected losses and the total lending capacity of the system are more sensitive to the regulations place on the larger financial institutions.

This is joint work with Feihong Hu and Daniel Mitchell.