Complexity and Crises in Financial Systems

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate credit losses in a financial system. Systemic stability is explored in a general financial system comprising three distinct, but interconnected, sets of agents - domestic banks, international financial institutions, and firms. We calibrate the model to advanced country banking sector data and obtain sensible aggregate loss distributions which are b-modal in nature. Large scale system-wide disruption when macroeconomic and asset price feedback effects interact is possible as a result. The greater the heterogeneity of banks' balance sheets, the less likely is the scope for widespread bank default.