The financial system as a network
The financial system as a network The global financial system is not a linear chain of institutions. It is a network of banks, funds, governments, central banks, exchanges, clearing houses, companies and investors through which money, credit, collateral and information flow. Mechanism A change in one node can transmit through funding, hedging or forced repricing into an entirely different market. What to monitor money and credit flows major counterparties collateral links areas with the highest leverage What can change the outcome Network relationships change through time. A map that worked in one regime may fail in another. Connection to the system Every node in the financial system is both a source and a recipient of information, capital and risk. Read this mechanism together with the price of money, liquidity availability, balance-sheet structure and the reaction of other markets. Analytical control What is cause and what is merely effect? Which participant in the system is forced to act? Where is the price of funding or collateral changing? Which other market should confirm the mechanism? What would invalidate this