Figure 3 : Toy model of an interbank network that oscillates between stability and instability.
Going from a–e we add one or more edges every time, always redistributing the weights so that interbank leverages do not change. Added edges are green, while modified edges are red. The initial network in a is a DAG, hence λmax=0, and for simplicity all edges have the same weight ω. Suppose that, as we show in f, ω is chosen such that λmax<1 in d, but λmax>1 in e. We then have that network in b is stable, even though a cycle has appeared. The further addition of one more cycle makes network in c unstable. Network in d becomes stable again after the addition of two edges, and finally network in e is again unstable.
