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.
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We are indebted to colleagues (particularly S. Kapadia, N. Arinaminpathy and G. Sugihara), who made many helpful comments and constructive criticisms.
The authors declare no competing financial interests.
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Haldane, A., May, R. Systemic risk in banking ecosystems. Nature 469, 351–355 (2011). https://doi.org/10.1038/nature09659
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