Towards a resilient financial system

Abstract

Resilience is a property of a system, which focuses on the recovery ability of the system after a shock to the system. Financial system plays a key role in our society by performing its functions like risk sharing and information transferring etc. Therefore, resilience is especially important for the financial system. For the past few years, with the explosive development of financial innovations, a more intricate financial system appeared due to the interaction effects during this process. Hence it is necessary for us to study the resilience property in such a complicated financial environment. The objective of this thesis is to investigate the resilience property of financial systems. In this thesis, four key studies have been done to achieve this objective. First, a domain model is proposed on the basis of a general domain modeling tool called function-context- behavior-principle-state-structure (FCBPSS) to understand the financial system. A case study of the management and improvement regulation strategy for the financial system in abnormal contexts is investigated to illustrate the usefulness and effectiveness of the proposed domain model. Second, a novel dynamic network model is put forward to study the risk contagion process in the financial system. On the basis of this risk contagion process as well as recovery solutions, a resilience measurement model is proposed to quantitatively evaluate the financial system resilience. Third, discussions on two types of recovery solutions, banks merging and capital injection, are presented in details. Fourth, due to the popularity of the Internet finance in China, we analyze and conclude its potential influence on traditional Chinese financial system from both qualitative and quantitative perspectives. The resilience property in Chinese financial system is measured with consideration of the influence brought by Internet finance. Some conclusions can be obtained upon the work mentioned above: (1) the financial system matches depositors and investors and aims at providing financial services for them through financial institutions which are complex and closely connected; (2) the resilience property of financial systems is about the recovery ability of these systems when there are shocks into them, and it is necessary to take recovery solutions into consideration during the investigation and measurement process; (3) recovery solutions are proved to be able to improve system performance significantly during distress times, and proper recovery solutions are required on the basis of specific characteristics of different financial systems; (4) financial innovations like Internet finance do bring some influence to traditional financial systems to some extent, and regulation or supervision work should be put in place to avoid more negative effects being generated . The contribution of this thesis can be summarized from three perspectives. Firstly, it presents a better understanding of the financial system and its resilience property. Secondly, it provides some suggestions for the supervision or regulation department on determining the best recovery strategy or preventive policies during financial distress periods. Thirdly, it offers a comprehensive way to study financial systems by taking the influence of financial innovations into consideration.