Too-connected-to-fail Institutions and Payments System’s Stability: Assessing Challenges for Financial Authorities

Carlos León, Clara Machado (), Freddy Cepeda-Lopez and Miguel Sarmiento ()

Borradores de Economia from Banco de la Republica de Colombia

Abstract: The most recent episode of market turmoil exposed the limitations resulting from the traditional focus on too-big-to-fail institutions within an increasingly systemic-crisis-prone financial system, and encouraged the appearance of the too-connected-to-fail (TCTF) concept. The TCTF concept conveniently broadens the base of potential destabilizing institutions beyond the traditional banking-focused approach to systemic risk, but requires methodologies capable of coping with complex, cross-dependent, context-dependent and non-linear systems. After comprehensively introducing the rise of the TCTF concept, this paper presents a robust, parsimonious and powerful approach to identifying and assessing systemic risk within payments systems, and proposes some analytical routes for assessing financial authorities’ challenges. Banco de la Republica’s approach is based on a convenient mixture of network topology basics for identifying central institutions, and payments systems simulation techniques for quantifying the potential consequences of central institutions failing within Colombian large-value payments systems. Unlike econometrics or network topology alone, results consist of a rich set of quantitative outcomes that capture the complexity, cross-dependency, context-dependency and non-linearity of payments systems, but conveniently disaggregated and dollar-denominated. These outcomes and the proposed analysis provide practical information for enhanced policy and decision-making, where the ability to measure each institution’s contribution to systemic risk may assist financial authorities in their task to achieve payments system’s stability.

Keywords: Payments systems; too-connected-to-fail; too-big-to-fail; systemic risk; network topology; simulation; central bank liquidity. (search for similar items in EconPapers)
JEL-codes: C63 D85 E44 E58 G21 (search for similar items in EconPapers)
Date: 2011-03
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.32468/be.644 (application/pdf)

Related works:
Working Paper: Too-connected-to-fail Institutions and Payments System´s Stability: Assessing Challenges for Financial Authorities (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:644

Access Statistics for this paper

More papers in Borradores de Economia from Banco de la Republica de Colombia Cra 7 # 14-78. Contact information at EDIRC.
Bibliographic data for series maintained by Clorith Angélica Bahos Olivera ().