Discussion

Discussion: 

The four different sets of results demonstrate how each scenario reacts under various starting equity of the banks.  The graphs then are examined and it can be seen that the CCP is not helpful for reducing risk without an unreasonable monetary investment. In the first, second, and fourth scenarios, society would have to invest $1 billion to provide the system with a smaller, but not much smaller, systemic risk.  In the third scenario, where only one bank has 10% its equity available, the CCP is helpful at reducing systemic risk at a value of $850 million, which is still a large amount of money invested by society for one bank.  In addition, the graph results from the third scenario suggests that when there is only one bank defaulting, the amount of money needed to recover the system is significantly smaller than when multiple banks default.  Therefore, more money will be spent on the CCP than what it would take to repair the damages for only one bank failing.  Figure 7 is similar in that the CCP will be able to repair the damage of $15 million in the network but would need an initial investment into the CCP of $900 million. Overall, our results show that a large amount of money is needed to initially fund the CCP which is not financially beneficial for a network of banks.

Since this is a simplified model, there are a couple of assumptions that are made which may have strengthened our results but restricted them from being completely realistic. First, the starting equity of each bank is composed of only its purely liquid assets. Taking only one measure of liquidity (cash) simplifies the model so that we can explain the effects all instantaneously. However, this is not realistic, as banks take a relatively long time to default and, when given time, the bank will be able to liquidate more assets and sell investments if necessary. This opens the door for more thorough and accurate research to be done. With a more advanced understanding of accounting, one can possibly find another way to represent the company’s liquidity. In addition, since the time used in this simulation is fictitious time because it is just iterations within the model, this cannot be modeled over real time, which will pose more problems since liquidity varies over time.