Modeling and Maintaining Financial Network Performance

In moments of financial crisis caused by a given bank’s failure or the failure of the assets they own, fire-sale liquidation strategies are often implemented to maintain financial performance. Such rapid liquidation practices lead to quick and extreme asset devaluation, and consequential network stability issues. To make matters worse, real-world financial network are complex webs of overlapping asset portfolios, in which the failure of one asset or bank can have serious effects on the solvency of all banks within the network.

Our team uses mathematical modeling of such an interwoven financial network to both model behavior in a crisis situation, as well as drive all network bank portfolios to financial solvency. Specifically, we aimed to drive all network banks to the regulatory “capital ratio” of 8%. To get a more in-depth look at how this capital ratio works, click here.