Mark D. Flood from US Treasury.
Paper: Topological Approaches to Financial Network Complexity
Complexity is often cited as a fundamental factor affecting financial system efficiency and stability, but these conversations frequently fail to define “complexity” precisely. In two papers, we develop network complexity measures grounded in basic graph theory and algebraic topology. To make them useful, it is important to ground the measurement tools in specific economic issues. In one paper, we develop a collection of related measures that capture the coordination challenges that arise in unwinding a large network of financial obligations. We derive formal results for core-periphery networks, which are commonplace in large interbank dealer markets. In a second paper, we develop measures of the extent of jurisdictional overlap that can complicate the resolution of large bank holding companies (BHCs). BHCs are structured into intricate ownership hierarchies involving hundreds or even thousands of legal entities, where each subsidiary has its own legal form, assets, liabilities, managerial goals, and supervisory authorities. We propose metrics that focus on the graph quotient relative to certain partitions on the set of subsidiaries, such as charter type and regulatory jurisdiction. We illustrate the process with a case study of one large U.S. BHC.