The Financial System As The World Web

Opinion (From Nature): “Financial regulators and policy makers should focus on financial institutions that are ‘too central to fail’ as well as those that are ‘too big to fail’, research published in Scientific Reports this week suggests. …The authors find that during the peak of the crisis, a group of 22 financial institutions, which received most of the loans, became more central to the network, which means that the default of each one would have a larger economic impact on the whole network.

“Nodes represent financial institutions (selected as explained in the text). Outgoing links represent the estimated potential impact of an institution to another one. The nodes are positioned within a circle of radius 1, centered in 0. …Thus, the closer a node is to the center the higher is its Debt Rank. A node in the center (Debt Rank = 1) is able to put under distress the entire economic value of the network. Debt Rank decreases by moving outwards and leftwards along the spiral. The diagram allows at the same time to visualise the structure of the network and to compare the importance of any two given nodes. The size and the color of the node reflects the Debt Rank value (larger and red nodes have higher Debt Rank). The color of a link reflects the Debt Rank of the node from which it originates (red links originate from node with high Debt Rank and make high impact to the destination nodes). (a) Period one, at the beginning of the crisis. Most of the nodes have low levels of Debt Rank, i.e., they are located close to the border. (b) Period four (peak of the crisis). Nodes have comparable levels of Debt Rank. However, they are also much more central, i.e., they can impact a large fraction of the total economic value. A single default is likely to trigger a systemic failure.”

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