Rethinking financial stability: Challenges arising from financial networks’ modular scale-free architecture

Carlos León and Ron Berndsen

Journal of Financial Stability, 2014, vol. 15, issue C, 241-256

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.

Keywords: Financial networks; Contagion; Resilience; Robustness; Fragility (search for similar items in EconPapers)
JEL-codes: D53 D85 G01 G20 L14 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (55)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:15:y:2014:i:c:p:241-256

DOI: 10.1016/j.jfs.2014.10.006

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