title: Pathways towards instability in financial networks.
abstract: Following the financial crisis of 2007-2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive role, and a general understanding of precisely how network topology creates instability remains lacking. Here we show how processes that are widely believed to stabilize the financial system, that is, market integration and diversification, can actually drive it towards instability, as they contribute to create cyclical structures which tend to amplify financial distress, thereby undermining systemic stability and making large crises more likely. This result holds irrespective of the details of how institutions interact, showing that policy-relevant analysis of the factors affecting financial stability can be carried out while abstracting away from such details.
authors.affiliation: Department of Banking and Finance, University of Zurich, 8032 Zurich, Switzerland.|London Institute for Mathematical Sciences, London W1K 2XF, UK.
authors.forename: Marco
authors.initials: M
authors.lastname: Bardoscia
authors.affiliation: Department of Banking and Finance, University of Zurich, 8032 Zurich, Switzerland.
authors.forename: Stefano
authors.identifier: 0000-0002-0051-973X
authors.initials: S
authors.lastname: Battiston
authors.affiliation: Department of Computer Science, University College London, London WC1E 6BT, UK.|Systemic Risk Centre, London School of Economics and Political Sciences, London WC2A 2AE, UK.
authors.forename: Fabio
authors.initials: F
authors.lastname: Caccioli
authors.affiliation: London Institute for Mathematical Sciences, London W1K 2XF, UK.|IMT School for Advanced Studies, 55100 Lucca, Italy.|Institute of Complex Systems CNR, 00185 Rome, Italy.
authors.forename: Guido
authors.identifier: 0000-0001-9377-3616
authors.initials: G
authors.lastname: Caldarelli