LONDON Aug 2 As banking regulators around the
world scramble for tools to avert the next financial crisis,
Swiss researchers have devised a method that could allow
real-time monitoring of stresses in the financial system.
The tool, which a team at Zurich university Eidgenössische
Technische Hochschule are calling DebtRank, challenges the idea
that the biggest banks are the ones that need closest
"There is more to systemic importance than asset size,"
Stefano Battiston, who led the study, told Reuters. "You can
easily have two banks with the same balance-sheet size that have
a completely different impact.
"We are increasing the granularity in the understanding of
who is systemically important," he said.
Using algorithms similar to those that rank results for web
pages in a Google search, the researchers argue that even
smaller banks can be the source of major stresses in the
The financial crisis that started in 2008 exposed the limits
in national regulation of a banking industry that was globally
For much of the crisis, regulators and central banks knew
that the financial exposure of banks to each other could act
like a lightning rod for transmitting stress around the globe.
But the exposures were too opaque to get a detailed picture of
what was going on.
Even today, the researchers say, "there is no widely
accepted method for working out which institutions in a network
are the most important to the stability of the system".
The stress tests that regulators in the U.S. and Europe have
periodically run in the wake of the crisis have largely focused
on the size of bank balance sheets and their vulnerability to
the default of a major debtor.
Battiston and his team argue that this is too binary for the
close supervision needed to pick up stresses early enough to
prevent the collapse of a bank and the damaging ripple effect
through the rest of the system.
"Much attention in the public discussion is currently
devoted to the so-called too-big-to-fail institutions," the
"Our work shows that this debate should be broadened to the
network-theory notion of 'too-central-to-fail'."
Battiston and his team used data from the $1.2 trillion in
emergency loans made to global banks by the US Federal Reserve
between 2008 and 2010.
Because detailed information on debt exposure was hard to
come by, the researchers used interbank equity investment as a
proxy, which previous studies have shown to follow a similar
With the right inputs, the DebtRank tool can generate a
number for the total economic loss associated with any given
stress situation but can also produce graphics that show how
central a bank is in any developing crisis.
One of those graphics is a spiral diagram. As a bank moves
to the centre of the spiral it is becoming more systemically
important. If it moves to dead centre it suggests there is a
risk that could cause a systemwide collapse.
The EU-funded research, which appears in the academic
journal Scientific Reports, has excited interest from some of
the world's key central banks.
"We are already discussing with the European Central Bank as
well as several national central banks about how to apply
DebtRanks to their data," they said.