Associate Professor Teruyoshi Kobayashi of the Graduate School of Economics, Kobe University and others have proposed a new mechanism for the occurrence of a financial crisis.By considering the situation of having debts with different priorities among banks, we derived the conditions to keep the risk low.
Since the Lehman shock in 2008, much research has been done on the risks lurking in the financial market system.Models used in many studies consider imitating the behavior of others when the trader has no judgment of behavior.Many investors are trying to collect new information, but when the information is lost, it has been shown that somebody's slight actions can flood them with sell and buy orders.This model of financial transactions is called a cascade model, which is likened to a waterfall flowing from upstream to downstream.While the cascade model has been widely used, it has also been pointed out that there are some inadequacies.
If a financial institution goes bankrupt, priority creditors will be able to repay the remaining assets, while lower creditors will not.Traditional financial crisis models did not take into account the risks of these priorities.Associate Professor Kobayashi and his colleagues clarified the risks caused by bond priority by constructing a cascade model that considers the hierarchical structure of each bond priority.We also analyzed the conditions for keeping the risk of a financial crisis low, and clarified that high-priority debt should be at least 50% of the total market.
Currently, global financial regulations are set by the Basel Committee on the Bank for International Settlements (BIS), and countries are taking steps to avoid system risks.However, many studies have not previously considered the risks of different debt priorities, so it will be urgent to rethink future measures.The results of this study may trigger a new order in the global financial markets.
Source:[Kobe University] How will the financial crisis occur?Presenting a new mechanism