The social role of any company is to get the maximum profitability with the less risk. Due to Basel III, banks should now raise their minimum capital levels on an individual basis, with the aim of lowering the probability for a large crash to occur. Such implementation assumes that with higher minimum capital levels it becomes more probable that the value of the assets drop bellow the minimum level and consequently expects the number of bank defaults to drop also. We present evidence that in such new financial reality large crashes are avoid only if one assumes that banks will accept quietly the drop of business levels, which is counter-nature. Our perspective steams from statistical physics and gives hints for improving bank system resilience. Stock markets exhibit critical behavior and scaling features, showing a power-law for the amplitude of financial crisis. By modeling a financial network where critical behavior naturally emerges it is possible to show that bank system resilience is not favored by raising the levels of capital. Due to the complex nature of the financial network, only the probability of bank default is affected and not the magnitude of a money market crisis. Further, assuming that banks will try to restore  business levels, raising diversification and lowering their individual risk, the dimension of the entire financial network will increase, which has the natural consequence of raising the probability of large crisis .
We address the problem of banking system resilience by applying off-equilibrium statistical physics to a system of particles, representing the economic agents, modelled according to the theoretical foundation of the current banking regulation, the so called Merton-Vasicek model. Economic agents are attracted to each other to exchange `economic energy', forming a network of trades. When the capital level of one economic agent drops below a minimum, the economic agent becomes insolvent. The insolvency of one single economic agent affects the economic energy of all its neighbours which thus become susceptible to insolvency, being able to trigger a chain of insolvencies (avalanche). We show that the distribution of avalanche sizes follows a power-law whose exponent depends on the minimum capital level. Furthermore, we present evidence that under an increase in the minimum capital level, large crashes will be avoided only if one assumes that agents will accept a drop in business levels, while keeping their trading attitudes and policies unchanged. The alternative assumption, that agents will try to restore their business levels, may lead to the unexpected consequence that large crises occur with higher probability .
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The social role of any company is to get the maximum profitability with the less risk. Due to Basel III, banks should now raise their minimum capital levels on an individual basis, with the aim of lowering the probability for a large crash to occur. Such implementation assumes that with higher minimum capital levels it becomes more probable that the value of
We address the problem of banking system resilience by applying off-equilibrium statistical physics to a system of particles, representing the economic agents, modelled according to the theoretical foundation of the current banking regulation, the so called Merton-Vasicek model. Economic agents are attracted to each other to exchange `economic energy', forming a network of trades. When the capital level of one economic agent drops below a minimum,
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assets drop bellow the minimum level and consequently expects the number of bank defaults to drop also. We
economic agent becomes insolvent. The insolvency of one single economic agent affects the economic energy of all its neighbours which thus become susceptible to insolvency, being able to trigger a chain of insolvencies (avalanche). We show that the distribution of avalanche sizes follows a power-law whose exponent depends on the minimum capital level. Furthermore, we
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in such new financial reality large crashes are avoid
under an increase in the minimum capital level, large crashes will be avoided
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banks will accept quietly the drop of
agents will accept a drop in
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which is counter-nature. Our perspective steams from statistical physics and gives hints for improving bank system resilience. Stock markets exhibit critical behavior and scaling features, showing a power-law for the amplitude of financial crisis. By modeling a financial network where critical behavior naturally emerges it is possible to show that bank system resilience is not favored by raising the levels of capital. Due to the complex nature of the financial network, only the probability of bank default is affected and not the magnitude of a money market crisis. Further, assuming that banks
while keeping their trading attitudes and policies unchanged. The alternative assumption, that agents
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their
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raising diversification and lowering their individual risk, the dimension of the entire financial network will increase, which has the natural consequence of raising the probability of large crisis
may lead to the unexpected consequence that large crises occur with higher probability