Financial markets are exposed to systemic risk (SR), the risk that a major fraction of the system ceases to function and collapses. Since recently it is possible to quantify SR in terms of underlying financial networks where nodes represent financial institutions, and links capture the size and maturity of assets (loans), liabilities, and other obligations such as derivatives. In particular it is possible to quantify the share of SR that individual nodes contribute to the overall SR in the financial system. We extend the notion of node-specific SR to individual liabilities in a financial network (liability-specific SR) . We use historical, empirical data of  interbank liabilities to show that a few liabilities in a nation-wide interbank network contribute to the major fraction of the overall SR. We propose a tax on individual transactions that is proportional to their contribution to overall SR. If a transaction does not increase SR it is tax free. We use a macroeconomic agent based model (CRISIS macro-financial model) with a financial economy to demonstrate that the proposed Systemic Risk Tax (SRT) leads to a URLanized re-structuring of financial networks , that are practically free of SR. This is because risk-increasing transactions will be systematically avoided when a SRT is in place. Systemic stability under a SRT emerges due to a de facto elimination of system-wide cascading failure. ABM predictions agree remarkably well with the empirical data and can be used to understand the relation of credit risk and systemic risk .
Financial markets are exposed to systemic risk (SR), the risk that a major fraction of the system ceases to function and collapses. Since recently it is possible to quantify SR in terms of underlying financial networks where nodes represent financial institutions, and links capture the size and maturity of assets (loans), liabilities, and other obligations such as derivatives. We show that it is possible to quantify the share of SR that individual liabilities in a financial network contribute to the overall SR . We use empirical data of nation-wide interbank liabilities to show that a few liabilities carry the major fraction of the overall SR. We propose a tax on individual transactions that is proportional to their contribution to overall SR. If a transaction does not increase SR it is tax free. With an agent based model (CRISIS macro-financial model) we demonstrate that the proposed Systemic Risk Tax (SRT) leads to a URLanized re-structuring of financial networks that are practically free of SR. ABM predictions agree remarkably well with the empirical data and can be used to understand the relation of credit risk and SR .
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In particular
We show that
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nodes contribute to the overall SR in the financial system. We extend the notion of node-specific SR to individual
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(liability-specific SR)
contribute to the overall SR
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historical,
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nation-wide
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in a nation-wide interbank network contribute to
carry
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We use a macroeconomic
With an
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with a financial economy to
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This is because risk-increasing transactions will be systematically avoided when a SRT is in place. Systemic stability under a SRT emerges due to a de facto elimination of system-wide cascading failure.
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systemic risk
SR