In the era of globalized economy,
it is clear that all corporations, banks and countries form part of a
huge system of systems. As turbulence increases and the possibility of
shocks and extreme events rises, the importance of a systems perspective
of the economy becomes evident. In fact, due to turbulence, and
because the global economy is increasingly fragile, in highly
interconnected systems the propagation of stresses and traumas is very
fast and can lead to a huge number of possible often surprising
outcomes. This number increases with the complexity of the system.
However, the idea and concept of “systemic risks”, even though it has
become popular during the current economy meltdown, is very difficult to
define. By “systemic” we refer of course to anything that can have
repercussions (damage, consequences) at system level. For example, the
so-called Too-Big-To-Fail companies are thought to be of systemic
importance as their collapse could affect the economy severely. The TBTF
concept, however, is becoming less significant and a new idea – Too
Complex To Survive – is gaining popularity precisely because of what a
systems approach can teach us. Since excessive complexity is a
formidable source of vulnerability (exposure) and because the global
economy is increasingly complex, a systems approach is mandatory.
Conventional pre-crisis techniques of risk assessment, management and
rating have been conceived in an almost turbulence-free world and are
not applicable to the new situation as the current crisis so eloquently
demonstrates. This paper illustrates a new approach – based on the
quantification of complexity – which is not only applicable to systems
as such, it naturally provides measures of their resilience, stability
and, most importantly, allows one to better understand their dynamics
and functioning. In particular, applications to banks and systems of
banks shall be illustrated and discussed.
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