<abstract xmlns="http://www.w3.org/1999/xhtml"><p> Systemic risk is a fundamental constituent of contemporary financial systems. For the past decades a growing number of abrupt upsets in financial systems could be observed. Due to previous experiences, politicians and regulators prefer to identify the offenders outside the system or to blame one of the entities inside the system. However, nowadays many disasters in anthropogenic systems cannot be perceived that way. They are often results of inappropriate interactions rather than external or internal impulses. This requires a paradigm shift in thinking about systemic risk. A component-oriented perspective should be nowadays replaced with a network-oriented view. Closer insight into the concept of systemic risk can refer to the model of the system composed of a huge number of interconnected components. In such a system, systemic risk is usually considered to have a ‘cascading’, ‘domino’ or ‘contagion’ effect, resulting from strong connections. An initial failure could have disastrous effects and cause extreme damage as the number of network nodes goes to infinity. Strongly interconnected, complex dynamic systems cannot be understood by the simple sum of their components’ properties, in contrast to loosely coupled systems. What makes the behaviour of complex financial systems particularly unpredictable is that systemic failures may occur even if everybody involved is highly skilled, highly motivated and behaving properly.</p></abstract>

Systemic risk is a fundamental constituent of contemporary financial systems. For the past decades a growing number of abrupt upsets in financial systems could be observed. Due to previous experiences, politicians and regulators prefer to identify the offenders outside the system or to blame one of the entities inside the system. However, nowadays many disasters in anthropogenic systems cannot be perceived that way. They are often results of inappropriate interactions rather than external or internal impulses. This requires a paradigm shift in thinking about systemic risk. A component-oriented perspective should be nowadays replaced with a network-oriented view. Closer insight into the concept of systemic risk can refer to the model of the system composed of a huge number of interconnected components. In such a system, systemic risk is usually considered to have a ‘cascading’, ‘domino’ or ‘contagion’ effect, resulting from strong connections. An initial failure could have disastrous effects and cause extreme damage as the number of network nodes goes to infinity. Strongly interconnected, complex dynamic systems cannot be understood by the simple sum of their components’ properties, in contrast to loosely coupled systems. What makes the behaviour of complex financial systems particularly unpredictable is that systemic failures may occur even if everybody involved is highly skilled, highly motivated and behaving properly.

Financial Networks as a Source of Systemic Instability

University of Economics in Katowice, Department of Banking and Financial Markets,

Financial Internet Quarterly

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Financial Networks as a Source of Systemic Instability"}

Systemic risk is a fundamental constituent of contemporary financial systems. For the past decades a growing number of abrupt upsets in financial systems could...

Financial Networks as a Source of Systemic Instability

Published Online: Feb 09, 2017

Page range: 59 - 68

Received: Aug 10, 2015

Accepted: Jul 22, 2016

DOI: https://doi.org/10.1515/fiqf-2016-0002

Keywords
systemic risk, financial system, network, contagion

© 2017

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Financial Networks as a Source of Systemic Instability

Published Online: Feb 09, 2017

Page range: 59 - 68

Received: Aug 10, 2015

Accepted: Jul 22, 2016

DOI: https://doi.org/10.1515/fiqf-2016-0002

Keywordssystemic risk, financial system, network, contagion

© 2017

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
systemic risk, financial system, network, contagion