A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central banks as system stabilizers and liquidity providers is elucidated. Both the Chicago Plan and the Free Banking Proposal are discussed. It is shown how in the process of money creation, banks become naturally interconnected. A novel Extended Structural Default Model describing the stability of the Interconnected Banking Network is proposed. The purpose of bank capital and liquidity is explained. A multi-period constrained optimization problem for a bank’s balance sheet is formulated and solved in a simple case. Both theoretical and practical aspects are covered.
Alexander Lipton is a Managing Director, Quantitative Solutions Executive at Bank of America, Visiting Professor of Quantitative Finance at University of Oxford and Advisory Board member at the Oxford-Man Institute.
Prior to his current role, he was a Managing Director, Co-head of the Global Quantitative Group at Bank of America Merrill Lynch and a Visiting Professor of Mathematics at Imperial College London. Earlier, he was a Managing Director and Head of Capital Structure Quantitative Research at Citadel Investment Group in Chicago; he has also worked for Credit Suisse, Deutsche Bank and Bankers Trust. Before switching to finance, Alex was a Full Professor of Mathematics at the University of Illinois and a Consultant at Los Alamos National Laboratory. He received his undergraduate and graduate degrees in pure mathematics from Moscow State University.
Lipton’s interests encompass all aspects of financial engineering, including large-scale bank balance sheet modeling and optimization, enterprise-wide holistic risk management and stress testing, CCPs, electronic trading, trading strategies, payment systems, theory of monetary circuit, as well as hydrodynamics, magnetohydrodynamics, and astrophysics. Lipton authored two books, and edited five books, including, most recently, Risk Quant of the Year Award, Risk Books, London, 2014, and The Oxford Handbook of Credit Derivatives, Oxford University Press, Oxford, 2011 (with Andrew Rennie). He published more than a hundred scientific papers on a variety of topics in applied mathematics and financial engineering.
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