Systemic Risk Analysis and SIFIs Detection: A Proposal for a Complete Methodology

Abstract

The paper starts reviewing the financial systemic risk mechanisms and how to measure this risk. Then, it proposes to develop an agent-based multi-layer network simulation suited to measure the systemic risk, in order to identify Systemically Important Financial Institutions (SIFIs), and to understand the best policies both to prevent the distress and to mitigate the contagion. The methodology will correctly model the direct network contagion channel (interconnectedness of balance sheet of financial institutions, including direct losses and liquidity hoarding), also integrating the indirect contagion channel (fire sales and bank runs), in order to reach the ground-breaking target of a full representation of the financial systemic risk.