Global private capital: A network perspective

Modeling global inter-lender syndicated loans as a network reveals that like other complex systems (like those found in nature) the inter-bank network displays small world properties. Translation? The failure of a random institution is unlikely to cause other than some limited local pain, but if certain institutions disappear the network suffers cascading failures, community dissolution, and financial crises. We can identify these institutions ex ante, that is, before something bad happens. Unlike current ad hoc methodologies used to identify important banks, network methodology identifies dynamically systemically important firms. That way, institutions are not always "too big to fail" and therefore insulated from market discipline. The full paper may be found here