Rethinking financial stability

Challenges arising from financial networks' modular scale-free architecture

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We examine the connective architecture of the main Colombian payment and settlement systems in order to update what we know about local financial networks, and to elaborate on the main consequences for financial stability. Evidence suggests that local financial networks display a modular (i.e. clustered) scale-free (i.e. inhomogeneous) architecture. Results concur with other real-world networks, and propose new insights and challenges for authorities contributing to financial stability. For instance, (i) traditional reductionist assumptions for modeling financial systems (e.g. homogeneity) may be particularly misleading; (ii) the observed modular scale-free architecture favors robustness and resilience; (iii) the generating process of such architecture overlaps with literature on trading relationships; (iv) carelessly reducing inhomogeneity in financial systems may backfire in the form of a less robust and less resilient financial system; and (v) financial authorities should understand and take advantage of the existing architecture by means of designing and implementing macro-prudential regulation and system-calibrated requirements.
Original languageEnglish
Pages (from-to)241-256
JournalJournal of Financial Stability
Volume15
DOIs
Publication statusPublished - Dec 2014

Fingerprint

Financial stability
Financial system
Financial networks
Authority
Homogeneity
Prudential regulation
Payment
Resilience
Robustness
Modeling

Keywords

  • financial networks
  • contagion
  • resilience
  • robustness
  • fragility

Cite this

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title = "Rethinking financial stability: Challenges arising from financial networks' modular scale-free architecture",
abstract = "We examine the connective architecture of the main Colombian payment and settlement systems in order to update what we know about local financial networks, and to elaborate on the main consequences for financial stability. Evidence suggests that local financial networks display a modular (i.e. clustered) scale-free (i.e. inhomogeneous) architecture. Results concur with other real-world networks, and propose new insights and challenges for authorities contributing to financial stability. For instance, (i) traditional reductionist assumptions for modeling financial systems (e.g. homogeneity) may be particularly misleading; (ii) the observed modular scale-free architecture favors robustness and resilience; (iii) the generating process of such architecture overlaps with literature on trading relationships; (iv) carelessly reducing inhomogeneity in financial systems may backfire in the form of a less robust and less resilient financial system; and (v) financial authorities should understand and take advantage of the existing architecture by means of designing and implementing macro-prudential regulation and system-calibrated requirements.",
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Rethinking financial stability : Challenges arising from financial networks' modular scale-free architecture. / Leon Rincon, Carlos; Berndsen, Ron.

In: Journal of Financial Stability, Vol. 15, 12.2014, p. 241-256.

Research output: Contribution to journalArticleScientificpeer-review

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