Applications and Frontiers
Edited by Victor Galaz
Chapter 11: The system made me do it? Regulating systemic risk
This paper argues for the importance of analyzing globalization and governance of systemic risk through the lens of complex adaptive systems. This systems-thinking allows us to better appreciate the risks involved in creating a global web with emergent properties. The Global Financial Crisis is a perfect illustration of how systemic risks can lead to the breakdown of global institutions. Often the risks are not visible to one actor because while their counterparty may be reliable and solvent, this counterparty's counterparties may default in ways that create contagion that propagates through the system, affecting numerous parties they are not immediately connected to. The traditional method of monitoring individual actors does not account for these threats. A method of analyzing and monitoring the whole system would require monitoring the relationships between actors and ensuring that actors are aware of not just exposure to their counterparties, but to the second-order effects and higher-order effects—the counterparties of that actor’s immediate counterparties.
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