Fair use warning!!! Totally speculative blog post...

In my last post I mentioned that a major difficulty for policymakers in designing regulatory policy was how to develop a framework to mitigate systemic risk in an environment where there is a trade-off between mitigating individual risk and systemic risk. I have an idea...

Study the evolution of communities of agents within the financial sector using network data and some set of risk measures. In theory, at least, the agents within these evolving community structures should be affected by some common key drivers of individual risk (given that they are in the same community). Then try to develop a regulatory framework that encourages the individuals within communities to mitigate community risk...the idea is that this difficult coordination task would be made easier given that the agents are affected by a common set of risk drivers.

This idea implicitly assumes that, in terms of mitigating systemic risk, mitigating risk individually at the community level is somehow better than mitigating risk individually at the level of the individual agent. But is there any basis for this belief? I have no idea...perhaps this idea is only a good one insofar as it makes the policymakers job easier...but I am not even convinced it does...

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## Wednesday, August 25, 2010

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