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Infrastructure Resilience Conference 2018

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Credit Disintermediation and Financial Network Resilience

Technological innovations increasingly allow for the displacement of traditional financial intermediaries by direct capital flows between economic agents. In this research project, I aim to explore the resilience of the two distinct financial system architectures that compete against the backdrop of this technological shift, (i) a traditional bank-based financial system and (ii) a disintermediated, market-based financial system. In the traditional bank-based regime, banks finance long-term loans through short-term deposits. This maturity transformation subjects financial institutions to the risk of bankruptcy, thereby exposing the system to negative externalities, such as asset price shocks, public bail-outs and systemic risk. In the disintermediated financial regime on the other hand, individual depositors finance credit assets directly through peer-to-peer loan contracts. As there is no maturity mismatch in the disintermediated regime, deposits are less liquid. However, as economic losses are absorbed directly by individual creditors, this also avoids the negative externalities from firm bankruptcy observed in the bank-based regime. To compare the resilience of the two financial system architectures, I model the different regimes as financial networks where the nodes represent either depositors, borrowers or banks and the edges represent credit contracts. The regimes are represented by two distinct network topologies and a deterministic contagion process is applied to model systemic shocks. This allows me to identifying the loss absorbing nodes and to thereby compare the systemic resilience of the different regimes. The aim of this research project is to contribute to the understanding of the novel and largely unexplored concept of market-based lending and its relation to established research on financial stability and resilience in bank-based economies.

Erasmus-Maria Elsner
ETH Zurich


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