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scenario-planning more than a couple of years ahead. This exercise has enlightened the wider integrated assessment modeling community about what it could offer the private sector in the future.” If a climate-related catastrophe hits a bank, the financial damage can propagate between institutions. This phenomenon – systemic risk – arises because they are interlinked by networks of credit. After the financial crisis of 2007–2008, it became clear that this mesh of credit obligations meant that, if one collapsed, others could rapidly follow. Since then, regulators have taken precautions against future crises, partly by requiring banks to hold a capital cushion. In 2016, IIASA researchers Sebastian Poledna and Stefan Thurner however demonstrated that this approach doesn’t work. Systemic risk arises because of the multiple transactions going on in the financial markets. You can only control the problem by rearranging those obligations or links. Their solution was to levy a charge on transactions based on the level of risk that each added to the system – a systemic risk tax. Poledna modeled the effects of such a levy, demonstrating that it would drive the network into safer behavior and even eliminate the risk of collapse. In another study, IIASA Young Scientists Summer Program participant Anton Pichler and colleagues demonstrated how to halve systemic risk without damaging individual banks by rearranging institutions’ portfolios while keeping their overall size and risk profile the same. They simulated a government bond market where financial institutions had common asset holdings. This overlap meant that, when one went bankrupt and sold its portfolio, there was a wave of collapses. After rearranging the portfolios, however, there was not a single default. “Nudging portfolio changes in real life would take something akin to a systemic risk tax,” says Poledna. Regulators concerned with systemic risk have focused on the financial sector but systems analysis shows that it is of even greater concern in the non-financial sector. This was the surprising finding after Poledna and colleagues devoted 18 months to building a model of all the credit links within the entire Austrian business sector – 170,000 companies and banks. In the model, they allocated every firm and bank a “DebtRank” – the degree to which its own financial distress would transmit to the network. While large banks topped the list, some medium-sized, non-financial firms were also important. One ranked as high as eighth because its default would affect almost 40% of the Austrian economy. “Overall, non- financial firms contributed 55% of the risk, something that regulators need to consider,” says Poledna. Modelers are proving their worth in insurance, climate-related risks, and systemic risk but Thurner believes regulators are not moving fast enough, at least as far as the latter is concerned. “By now it’s becoming obvious to everyone that worldwide, systemic risk levels are rising, even though the current regulation scheme is getting tighter and tighter,” he says. “Maybe after the next crisis people will really rethink how we are doing things.” Further info: Ermoliev YM, Robinson SM, Rovenskaya E, & Ermolieva T (2018). Integrated Catastrophic Risk Management: Robust Balance between Ex-ante and Ex-post Measures. SIAM News 51 (6): p. 4. [pure.iiasa.ac.at/15426/] Poledna S, Hinteregger A, & Thurner S (2018). Identifying Systemically Important Companies by Using the Credit Network of an Entire Nation. Entropy 20 (10): p. 792. [pure.iiasa.ac.at/15540] Elena Rovenskaya: rovenska@iiasa.ac.at Sebastian Poledna: poledna@iiasa.ac.at Stefan Thurner: thurner@iiasa.ac.at 109 1010 1011 0 0.2 0.4 0.6 Totalassets (EUR) Banks Firms By now it’s becoming obvious to everyone that worldwide, systemic risk levels are rising, even though the current regulation scheme is getting tighter and tighter SEBASTIAN POLEDNA, IIASA RESEARCHER DebtRank of firms (dark green) and banks (light green) plotted against their total assets (as a proxy for firm size) in Euros. www.iiasa.ac.at 17OptionsSummer 2019