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Financial Networks – State of the Art and Open Challenges

24 November 2014
Publication Type: Policy Brief
Economic Theme: Public Finance
JEL Code: E5, E52, E6

The 2008 crisis caught most policymakers, including supervisors and central banks, off guard. Standard models said that diversification had enabled the financial system to withstand even fairly large shocks—including tremors in the sub-prime mortgage market. These models did not anticipate the knock on effects of the collapse of Lehman Brothers, and how shocks could reverberate through the global financial system. Consequently, regulation prior to the global financial crisis focussed almost exclusively on the microprudential supervision of individual financial institutions and neglected the non-linear nature of financial contagion.

Series title: Research Brief 17
1 November 2014
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