Size and complexity in model financial systems

The global financial crisis has precipitated an increasing appreciation of the need for a systemic perspective toward financial stability. For example: What role do large banks play in systemic risk? How should capital adequacy standards recognize this role? How is stability shaped by concentration and diversification in the financial system? We explore these questions using a deliberately simplified, dynamic model of a banking system that combines three different channels for direct transmission of contagion from one bank to another: liquidity hoarding, asset price contagion, and the propagation of defaults via counterparty credit risk. Importantly, we also introduce a mechanism for capturing how swings in “confidence” in the system may contribute to instability. Our results highlight that the importance of relatively large, well-connected banks in system stability scales more than proportionately with their size: the impact of their collapse arises not only from their connectivity, but also from their effect on confidence in the system. Imposing tougher capital requirements on larger banks than smaller ones can thus enhance the resilience of the system. Moreover, these effects are more pronounced in more concentrated systems, and continue to apply, even when allowing for potential diversification benefits that may be realized by larger banks. We discuss some tentative implications for policy, as well as conceptual analogies in ecosystem stability and in the control of infectious diseases.Although global financial systems have seen considerable growth in size, concentration, and complexity over the past few decades (1), our understanding of the dynamic behavior of such systems has not necessarily kept pace. Indeed, the current financial crisis has presented a stark demonstration of the potential for modern financial systems to amplify and disseminate financial distress on a global scale. From a regulatory perspective, these events have prompted fresh interest in understanding financial stability from a system level. In particular, although precrisis regulation (as typified by the Basel II accords) sought to minimize the risk of failure of individual banks irrespective of systemic importance, new regulation will seek to target the systemic consequences of bank collapse as well. To quote Haldane and May (2), “What matters is not a bank’s closeness to the edge of the cliff; it is the extent of the fall.”In this context, a clear feature of interest is the presence of large, highly connected banks. These banks have conceptual parallels in biology: simple models have been influential in underlining the importance of “superspreaders” in the spread and control of infectious diseases (3, 4), and “keystone” species are thought to serve a valuable role in ecosystem stability (5, 6). Here we develop dynamic models to apply and extend these lessons to financial systems. Our approach is theoretical, and our models necessarily oversimplified. Nonetheless, by considering transmission mechanisms specific to modern financial systems, our approach recognizes some important differences between these and other complex systems. We show how, even with such distinctions, the basic insights deriving from our model allow us to draw certain parallels with other situations where size and complexity are important.If financial crises may be compared with forest fires, causes for the initiating sparks pose important questions in their own right: for example, the role of excessive leverage and credit growth (7) or the pricing for complex financial instruments (8, 9). Here, however, our focus is on the role of large banks in the “flammability” of the system, or its capacity for amplification and propagation of an initiating shock. We ask the following questions: How does the impact of a bank’s collapse scale with its size? How might capital adequacy standards seek to mitigate this impact? More broadly, what is the effect of concentration and diversification on system stability?Network approaches (10–14) are well-suited for such questions, particularly in modeling contagion that is transmitted through linkages in the financial system. Here we adopt such an approach to bring together three important transmission channels into a unified framework: (i) liquidity hoarding, where banks cut lending to each other as a defensive measure (1, 15); (ii) asset price contagion linked to market illiquidity (16–18); and (iii) the propagation of defaults via counterparty credit risk (19–21).Although the network effects listed above act on defined webs of connectivity, confidence effects can operate more broadly, with the overall state of the system potentially influencing an individual bank’s actions, and vice versa. This motivates a special feature of our model, which explicitly integrates network dynamics with confidence effects.The interaction of such network and confidence effects arguably played a major role in the collapse of the interbank market (a network of lending exposures among banks) and global liquidity “freeze” that occurred during the crisis (22). Interbank loans have a range of maturities, from overnight to a matter of years, and may often be renewed, or rolled over, at the point of maturity. A pronounced feature of the 2007/2008 crisis was that, as the system deteriorated, banks stopped lending to each other at all but the shortest maturities (7, 29). The bankruptcy of Lehman Brothers in September 2008 transmitted distress further across the financial network, and signaled that there was no guarantee of government support for institutions in distress. The effects extended well beyond those institutions directly exposed to Lehman Brothers, with banks throughout the system withdrawing interbank lending outright and propagating distress to the real economy by sharply contracting household and corporate lending (23). At the time of writing, ongoing events illustrate the potential for similar dynamics in the context of sovereign and banking sector distress in some Eurozone countries.Several specific motivating factors have been proposed to explain “liquidity hoarding” (the maturity-shortening and ultimate withdrawal of interbank lending): precautionary measures by lending banks in anticipation of future liquidity shortfalls, counterparty concerns over specific borrowing banks, or collapses in overall system confidence (24, 25). Our framework parsimoniously incorporates all of these mechanisms, but also captures the idea that a bank’s distress may affect not just those directly exposed or linked to it, but also confidence in the market at large.In what follows we summarize essential features of the model structure, with details provided in Materials and Methods, and a summary of model parameters and their default values given in Table S1. We use this model to explore the impact of an initiating shock, with particular reference to the nonlinearities arising from each of the contagion channels modeled, the effects of size disparity among banks and system concentration, and the effects of diversification. We then outline tentative implications for regulatory capital requirements before discussing important caveats to our work. Throughout the paper, we abstract from extraordinary policy intervention in crisis, so that liquidity cannot be obtained more easily from the central bank than from the market, and failing institutions are not bailed out.     

Angiographic lesion severity and subsequent myocardial infarction

We sought to determine the angiographic severity of coronary lesions leading to ST-segment elevation myocardial infarction (STEMI) and non-STEMI (NSTEMI) with a focus on determining the impact of interval from initial angiogram to subsequent clinical event. In the late 1980s angiographic data on lesion characteristics that culminated in STEMI and NSTEMI were obtained from angiograms obtained several months before MI. It is not clear whether the conclusions on lesion severity would be different if elapsed interval from baseline angiogram to clinical event was factored in the analysis. From 2003 through 2010, we identified 84 patients with NSTEMI and 41 patients with STEMI in vessels without previous intervention. These patients had ≥1 previous angiographic study at our center. Angiograms were reanalyzed with quantitative coronary angiography, and relevant clinical data were obtained from medical records. Similar to previous studies, 71% of patients with STEMI and 63% of patients with NSTEMI had <50% baseline stenosis at the culprit site when the interval from initial angiogram to MI was >3 months. Interestingly, lesions that led to STEMI ≤3 months after evaluation were more severe than those leading to STEMI in >3 months (59 ± 31% vs 36 ± 21%, p = 0.02) with 57% of lesions having >50% stenosis. Although most MIs occurred at sites that did not have significant obstruction when examined >3 months before MI, most baseline lesions showed significant luminal narrowing when examined ≤3 months before STEMI. In conclusion, high-grade coronary stenosis may be an important predictor of STEMI in subsequent months.     

Perceived peer safer sex norms and sexual risk behaviors among substance-using Latino adolescents

We investigated the association between perceived peer norms and safer sexual behaviors among substance using Latino youth. Between 2005 and 2006, cross-sectional data were collected from 92 Latino adolescents recruited from clinic- and community-based settings in two U.S. cities. Separate multivariate logistic regression models were used to assess the relationship between perceived peer norms around safer sex and two different outcomes: consistent condom use and multiple sexual partnerships. Among these participants, perceived peer norms encouraging safer sex were associated with consistent condom use even after controlling for individual- and partner-related factors. Perceived peer norms supporting safer sex were inversely associated with recently having two or more sexual partners after controlling for demographic characteristics. Perceived peer norms around safer sexual behavior contribute to a lower likelihood of engaging in two HIV/STI risk behaviors: inconsistent condom use and multiple partnering. These findings suggest that further development of peer-based interventions for Latino youth is warranted.     

Successful surgical repair of iatrogenic pulmonary vein stenosis

Pulmonary vein stenosis can complicate ablation procedures for atrial fibrillation and often presents with severe respiratory symptoms. Described in this case report is a 21-year-old male who underwent a bilateral surgical augmentation of the pulmonary veins for severe occlusive pulmonary vein stenosis. The occluded left lower and right upper lobe veins were surgically modified to regain flow to the left atrium. Follow-up computed tomogram imaging showed patency of the veins intervened upon and an exercise test demonstrated an oxygen saturation of 98% at peak stress.This case report marks the first-ever surgical intervention for acquired pulmonary vein stenosis.     

Latent Growth Curve Modeling of Non-Injection Drug Use and Condomless Sexual Behavior from Ages 18 to 21 in Gay,Bisexual, and Other YMSM: The P18 Cohort Study

Background: HIV/AIDS continues to be a health disparity faced by sexual minority men, and is exacerbated by non-injection drug use. Objectives: We sought to delineate growth in non-injection drug use and condomless sex in a sample of racially and economically diverse of gay, bisexual, and other young men who have sex with men (YMSM) as they emerged into adulthood between the ages of 18 and 21 and who came of age in the post-HAART era. Methods: Behavioral data on drug use and condomless sex, collected via a calendar based technique over 7 waves of a cohort study of 600 YMSM, were analyzed using latent growth curve modeling to document patterns of growth in these behaviors, their associations, and the extent to which patterns and associations are moderated by race/ethnicity and socioeconomic status. Results: Significant growth was noted in the frequencies of condomless oral and anal intercourse, alcohol to intoxication, marijuana use, and inhalant nitrate use. High levels of association were noted between all behaviors across time but associations did not differ by either race/ethnicity or socioeconomic status. The link between drug use and risky sexual behavior continue to be evident in YMSM with significant increases in these behaviors demonstrated as YMSM transition between adolescence and young adulthood. Conclusions/Importance: Healthcare for a new generation of sexual minority males must address the synergy of these behaviors and also nest HIV prevention and care within a larger context of sexual minority health that acknowledges the advances made in the last three decades.