This book opens new ground in the study of financial crises. It treats the financial system as a complex adaptive system and shows how lessons from network disciplines - such as ecology, epidemiology, and statistical mechanics - shed light on our understanding of financial stability. Using tools from network theory and economics, it suggests that financial systems are robust-yet-fragile, with knife-edge properties that are greatly exacerbated by the hoarding of funds and the fire sale of assets by banks. The book studies the damaging network consequences of the failure of large inter-connected institutions, explains how key funding markets can seize up across the entire financial system, and shows how the pursuit of secured finance by banks in the wake of the global financial crisis can generate systemic risks. The insights are then used to model banking systems calibrated to data to illustrate how financial sector regulators are beginning to quantify financial system stress.
Prasanna Gai is Professor of Macroeconomics at the University of Auckland. He was appointed as Special Adviser to the Governor of the Bank of Canada for 2010-2011 and as the Academic Fellow of the Reserve Bank of New Zealand in 2012. Prior to his current position at Auckland, Professor Gai was Professor of Economics at the Australian National University and served as Senior Adviser at the Bank of England, responsible for directing its financial stability research. He holds a D.Phil and M.Phil in Economics from the University of Oxford and a Bachelor of Economics (Honours) from the Australian National University. Professor Gai has published widely on financial and monetary stability issues; his publications include 'Private Sector Involvement and International Financial Crises - An Analytical Approach' (with Michael Chui), also with Oxford University Press.
Foreword ; Preface ; 1. Introduction ; 2. The Robust-yet-fragile nature of Financial Systems ; 3. Systemic Liquidity Crises ; 4. Dynamic Credit Relationships ; 5. Covered Bonds and Systemic Risk ; 6. Quantifying Systemic Risk ; 7. Financial System Resilience ; 8. Conclusion