4 Counter-examples emerged, with some simple eco-systems – savannas and grasslands – found to exhibit high robustness and some complex eco-systems proving vulnerable to attack. Perhaps tellingly, large-scale clearance of tropical rainforests highlighted their inherent fragility. Not for nothing did rainforests become known as a “nonrenewable” resource from the early 1970s. 3  For example, Voute (1946) and Elton (1958). 4  For example, May (1974). 4  BIS Review 53/2009  Finance appears to be following in ecologists’ footsteps, albeit with a generational lag. Until recently, mathematical models of finance pointed to the stabilising effects of financial network completeness. 5 Connectivity meant risk dispersion. Real-world experience appeared to confirm that logic. Between 1997 and 2007, buffeted by oil prices shocks, wars and dotcom mania, the financial system stood tall; it appeared self-regulating and self-repairing. Echoes of 1950s ecology were loud and long. The past 18 months have revealed a system which has shown itself to be neither selfregulating nor self-repairing. Like the rainforests, when faced with a big shock, the financial system has at times risked becoming non-renewable. Many of the reasons for this have a parallel in other disciplines. In particular, in making sense of recent financial network dynamics, four mechanisms appear to have been important: connectivity; feedback; uncertainty; and innovation. (a)  Connectivity and stability  Over the past 30 years, a great deal has been established about the links between network connectivity and robustness. These lessons span a range of disciplines including physics, biology, engineering and epidemiology.

2  Corrigan (1987). BIS Review 53/2009  3  The second strategy was diversification of business lines. Firms migrated activity to where returns looked largest. As each new day dawned – leveraged loans yesterday, CDOs today, proprietary trading tomorrow – the whole sector was drawn to the new source of sunlight. Through competitive forces, finance engaged in a frantic game of follow-the-leader, played for real money. From an individual firm perspective, these strategies indeed looked like sensible attempts to purge risk through diversification: more eggs were being placed in the basket. Viewed across the system as a whole, however, it is clear now that these strategies generated the opposite result: the greater the number of eggs, the greater the fragility of the basket – and the greater the probability of bad eggs. Securitisation increased the dimensionality, and thus complexity, of the financial network. Nodes grew in size and interconnections between them multiplied. The financial cat’s-cradle became dense and opaque. As a result, the precise source and location of underlying claims became anyone’s guess. Follow-the-leader became blind-man’s buff. In short, diversification strategies by individual firms generated heightened uncertainty across the system as a whole. Meanwhile, a strategy of changing the way they had looked in the past led to many firms looking the same as each other in the present. Banks’ balance sheets, like Tolstoy’s happy families, grew all alike. So too did their risk management strategies. Financial firms looked alike and responded alike.