Pathways towards instability in financial networks

Following the financial crisis of 2007-2008, a deep analogy between the = origins of instability in financial systems and complex ecosystems has been= pointed out: in both cases, topological features of network structures inf= luence how easily distress can spread within the system. However, in financ= ial network models, the details of how financial institutions interact typi= cally play a decisive role, and a general understanding of precisely how ne= twork topology creates instability remains lacking. Here we show how proces= ses that are widely believed to stabilize the financial system, that is, ma= rket integration and diversification, can actually drive it towards instabi= lity, as they contribute to create cyclical structures which tend to amplif= y financial distress, thereby undermining systemic stability and making lar= ge crises more likely. This result holds irrespective of the details of how= institutions interact, showing that policy-relevant analysis of the factor= s affecting financial stability can be carried out while abstracting away f= rom such details.