Rethinking the financial network
01 Jan 2013-pp 243-278
TL;DR: The first official case of Severe Acute Respiratory Syndrome (SARS) was recorded in Guangdong Province, China on 16 November 2002, and panic ensued as mentioned in this paper.
Abstract: On 16 November 2002, the first official case of Severe Acute Respiratory Syndrome (SARS) was recorded in Guangdong Province, China. Panic ensued. Uncertainty about its causes and contagious consequences brought many neighbouring economies across Asia to a standstill. Hotel occupancy rates in Hong Kong fell from over 80 % to less than 15 %, while among Beijing’s 5-star hotels occupancy rates fell below 2 %.
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TL;DR: Elton's "The Ecology of Invasions by Animals and Plants" as mentioned in this paper is one of the most cited books on invasion biology, and it provides an accessible, engaging introduction to the most important environmental crises of our time.
Abstract: Much as Rachel Carson's \"Silent Spring\" was a call to action against the pesticides that were devastating bird populations, Charles S. Elton's classic \"The Ecology of Invasions by Animals and Plants\" sounded an early warning about an environmental catastrophe that has become all too familiar today-the invasion of nonnative species. From kudzu to zebra mussels to Asian long-horned beetles, nonnative species are colonizing new habitats around the world at an alarming rate thanks to accidental and intentional human intervention. One of the leading causes of extinctions of native animals and plants, invasive species also wreak severe economic havoc, causing $79 billion worth of damage in the United States alone. Elton explains the devastating effects that invasive species can have on local ecosystems in clear, concise language and with numerous examples. The first book on invasion biology, and still the most cited, Elton's masterpiece provides an accessible, engaging introduction to one of the most important environmental crises of our time. Charles S. Elton was one of the founders of ecology, who also established and led Oxford University's Bureau of Animal Population. His work has influenced generations of ecologists and zoologists, and his publications remain central to the literature in modern biology. \"History has caught up with Charles Elton's foresight, and \"The Ecology of Invasions\" can now be seen as one of the central scientific books of our century.\"-David Quammen, from the Foreword to \"Killer Algae: The True Tale of a Biological Invasion\
1,321 citations
TL;DR: Drawing analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread, the interplay between complexity and stability in deliberately simplified models of financial networks is explored.
Abstract: In the run-up to the recent financial crisis, an increasingly elaborate set of financial instruments emerged, intended to optimize returns to individual institutions with seemingly minimal risk. Essentially no attention was given to their possible effects on the stability of the system as a whole. Drawing analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread, we explore the interplay between complexity and stability in deliberately simplified models of financial networks. We suggest some policy lessons that can be drawn from such models, with the explicit aim of minimizing systemic risk.
1,237 citations
TL;DR: In this article, the authors provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk, and show that financial contagion exhibits a form of phase transition as interbank connections increase.
Abstract: We provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more "complete" interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network.
1,187 citations
TL;DR: In this article, the authors argue that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability.
Abstract: This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability. However, beyond a certain point, dense interconnections serve as a mechanism for the propagation of shocks, leading to a more fragile financial system. Our results thus highlight that the same factors that contribute to resilience under certain conditions may function as significant sources of systemic risk under others. (JEL D85, E44, G21, G28, L14)
898 citations
TL;DR: In this paper, the authors develop a network model of interbank lending in which unsecured claims, repo activity and shocks to the haircuts applied to collateral assume centre stage, and show how systemic liquidity crises of the kind associated with the interbank market collapse of 2007-2008 can arise within such a framework, with funding contagion spreading widely through the web of interlinkages.
778 citations
Cites background from "Rethinking the financial network"
...…and rewalls are familiar fail-safe devices against systemic problems in other networks, from infectious diseases spreading across people to infectious viruses spreading across the web, from transport networks to meteorology maps, from forest- re control to military control (Haldane, 2009)....
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...…have seen a progressive widening and broadening of the nancial safety net from last resort lending from the 19th century onwards, to deposit insurance from the 1930s, to the block-buster capital and liquidity support for both banks and non-banks during this century (Alessandri and Haldane, 2009)....
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...This is in part a result of data de ciencies as nancial data have tended to be collected and analysed on an institution by institution basis (Haldane, 2009)....
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...Complexity, Concentration and Contagion 3 Despite obvious parallels between nancial systems and complex systems in other elds (May et al, 2008; Haldane, 2009; Haldane and May, 2011), the use of network techniques from epidemiology and statistical physics to the study of nancial contagion is in its…...
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...1See Haldane (2009)....
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References
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TL;DR: Simple models of networks that can be tuned through this middle ground: regular networks ‘rewired’ to introduce increasing amounts of disorder are explored, finding that these systems can be highly clustered, like regular lattices, yet have small characteristic path lengths, like random graphs.
Abstract: Networks of coupled dynamical systems have been used to model biological oscillators, Josephson junction arrays, excitable media, neural networks, spatial games, genetic control networks and many other self-organizing systems. Ordinarily, the connection topology is assumed to be either completely regular or completely random. But many biological, technological and social networks lie somewhere between these two extremes. Here we explore simple models of networks that can be tuned through this middle ground: regular networks 'rewired' to introduce increasing amounts of disorder. We find that these systems can be highly clustered, like regular lattices, yet have small characteristic path lengths, like random graphs. We call them 'small-world' networks, by analogy with the small-world phenomenon (popularly known as six degrees of separation. The neural network of the worm Caenorhabditis elegans, the power grid of the western United States, and the collaboration graph of film actors are shown to be small-world networks. Models of dynamical systems with small-world coupling display enhanced signal-propagation speed, computational power, and synchronizability. In particular, infectious diseases spread more easily in small-world networks than in regular lattices.
39,297 citations
TL;DR: It is found that scale-free networks, which include the World-Wide Web, the Internet, social networks and cells, display an unexpected degree of robustness, the ability of their nodes to communicate being unaffected even by unrealistically high failure rates.
Abstract: Many complex systems display a surprising degree of tolerance against errors. For example, relatively simple organisms grow, persist and reproduce despite drastic pharmaceutical or environmental interventions, an error tolerance attributed to the robustness of the underlying metabolic network1. Complex communication networks2 display a surprising degree of robustness: although key components regularly malfunction, local failures rarely lead to the loss of the global information-carrying ability of the network. The stability of these and other complex systems is often attributed to the redundant wiring of the functional web defined by the systems' components. Here we demonstrate that error tolerance is not shared by all redundant systems: it is displayed only by a class of inhomogeneously wired networks, called scale-free networks, which include the World-Wide Web3,4,5, the Internet6, social networks7 and cells8. We find that such networks display an unexpected degree of robustness, the ability of their nodes to communicate being unaffected even by unrealistically high failure rates. However, error tolerance comes at a high price in that these networks are extremely vulnerable to attacks (that is, to the selection and removal of a few nodes that play a vital role in maintaining the network's connectivity). Such error tolerance and attack vulnerability are generic properties of communication networks.
7,697 citations
01 Jan 1991
TL;DR: A number of proposals have been advanced in recent years for the development of “general systems theory” which, abstracting from properties peculiar to physical, biological, or social systems, would be applicable to all of them.
Abstract: A number of proposals have been advanced in recent years for the development of “general systems theory” which, abstracting from properties peculiar to physical, biological, or social systems, would be applicable to all of them. We might well feel that, while the goal is laudable, systems of such diverse kinds could hardly be expected to have any nontrivial properties in common. Metaphor and analogy can be helpful, or they can be misleading. All depends on whether the similarities the metaphor captures are significant or superficial.
5,908 citations