gertrude tumpel - gugerell : recent advances in modelling systemic risk using network analysis introductory remarks by ms gertrude tumpel - gugerell, member of the executive board of the european central bank, at ecb workshop, frankfurt am main, 5 october 2009. * * * introduction ladies and gentlemen, i would like to welcome you to the workshop on “ recent advances in modelling systemic risk using network analysis ” here at the ecb. a workshop on systemic risk that provides an analytical focus on the financial sector as a network of financial agents could not come at a more timely moment. in 1896 the german sociologist georg simmel stated in his book “ the philosophy of money ” : “ money is the spider that spins society ’ s web ”. with this, simmel already at the time pointed to the network aspect of money, how financial innovation can transform the economy and society ; and the transformation process as changes in the complexity, size and nature of economic and societal networks. the recent financial crisis has strikingly illustrated the interconnectedness that characterises the global financial system. in providing a framework for strengthening financial stability, policy - makers are currently not only refining the regulatory and institutional set - up, but also looking for new analytical tools that help to better identify, monitor and address sources of systemic risk. therefore, i believe network analysis can make a relevant contribution and i am delighted that you have come together today to present and discuss new work in this field. let me give you three questions ( from the perspective of a policy - maker ) which today ’ s workshop would ideally shed light on : • what are the key channels and systemically important players that need special attention? • how can macro - prudential supervision take the interconnectedness into account? • and can network methodologies provide us with a useful tool in this respect? with these questions in mind, i have structured my introductory remarks into three parts. i will first give a short assessment of the relevance of systemic risk in the modern financial system. then i will discuss the use of network theories for the analysis of systemic risk. finally, i will briefly refer to network applications to payment and financial systems. 1. systemic risk in the modern financial system systemic risk refers to the possibility that a triggering event such as a bank failure or a market disruption could cause widespread disruption of the financial system, including significant difficulties in otherwise viable institutions or markets. preventing these negative externalities from impairing the functioning of the system and from spilling

together, these reforms reduce the probability of bank distress and improve the ability to deal with distress events through improved private sector risk sharing mechanisms. public bail outs become less likely. in this sense, the banking union addresses the sovereign - banknexus by reducing the probability that distressed banks negatively affect sovereign risk. at the same time, additional reforms can contribute to further increase the resilience of the european financial system and to enhance the consistency of the new institutional framework ( deutsche bundesbank 2014a ) : limiting banks ’ exposures to sovereign risk : the banking union has no direct implications for the prudential regulations of banks. most importantly, it does not address the regulatory treatment of banks ’ exposure to sovereign risk. under current prudential regulations, sovereign debt is treated as risk - free when calculating banks ’ capital requirements, and large exposure limits do not apply. this creates incentives for banks to hold exposures vis - a - vis governments with potential negative implications for private sector lending and financial stability. abolishing this preferential treatment of sovereign debt in prudential regulation would thus be an important bis central bankers ’ speeches complement to the institutional reforms that are already under way ( deutsche bundesbank 2014b ). completing the macroprudential toolbox : the ecb has also been given macroprudential powers. the main responsibility for the implementation of macroprudential measures still lies with national authorities. in the german case, some key macroprudential instruments are still missing. in 2015, the german financial stability council has thus issued a recommendation to create the legal basis for macroprudential instruments addressing potential systemic risks in the market for mortgage loans. 1 many other european countries have instruments available to set minimum standards for loan - to - value ratios, debt - service to income ratios, or minimum amortization requirements. in addition to the recommendation to create the necessary legal instruments in germany, the recommendation of the council also refers to the additional statistical requirements. current reporting systems for banks in germany do not allow monitoring risks resulting from mortgage lending and in particular possible changes in lending standards. ensure sufficient loss - absorbing capacity and limit exemptions from bail in : improved regulations and supervision reduce the probability of bank distress, but they do not eliminate these risks. banks thus need to have sufficient loss - absorbing capacity to successfully prevent the use of public funds in case when a resolution becomes necessary. internationally, standards for total loss - absorbing capacity ( tlac ) for global systemically important