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BRLSI March 2017 The next Financial Hurricane.pptx
The next Financial Hurricane
|08 March 2017||Economics||
What can complex networks teach us about financial fragility and systemic risk?
Professor Antonio Cabrales University College London
All financial crises are devastating, but the one in 2007-2008 was particularly serious. First because of its global reach, but also because the Western world had fallen into a sense of complacency (economists talked in earnest about ‘the end of business cycles’ or, slightly less self-delusively, as ‘the great moderation’). We now know that was a mirage. This lecture illustrated the potential of the new field of complex networks in addressing systemic risk problems, and highlighted why the notions of ‘too big to fail’ or even ‘too interconnected to fail’ are not enough to understand contagion. We rather need to look at the system global interconnectedness, and show that changing connectedness, both quantitatively but also qualitatively, can protect from systemic risk, sometimes better than capital buffers. We will also see that optimal policies need to take into account the statistical properties of the likely shocks to the system.
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