The price of complexity in financial networks

Financial institutions form multilayer networks by engaging in contracts= with each other and by holding exposures to common assets. As a result, th= e default probability of one institution depends on the default probability= of all of the other institutions in the network. Here, we show how small e= rrors on the knowledge of the network of contracts can lead to large errors= in the probability of systemic defaults. From the point of view of financi= al regulators, our findings show that the complexity of financial networks = may decrease the ability to mitigate systemic risk, and thus it may increas= e the social cost of financial crises.