A recent paper, co-authored with Prasanna Gai and Sujit Kapadia, attempts to fill that gap.4 We  1  For example, Committee on the Global Financial System (2010), “The role of margin requirements and haircuts in procyclicality”, CGFS Publications No. 36, Geanakoplos, J (2010), “Solving the present crisis and managing the leverage cycle”, Federal Reserve Bank of New York Economic Policy Review, August, 16 (1) and Kashyap, A K, Berner, R and Goodhart, C, “The Macroprudential Toolkit”, forthcoming in the IMF Economic Review. 2  http://www.hm-treasury.gov.uk/d/consult_newfinancial_regulation170211.pdf. 3  http://www.treasury.gov/press-center/press-releases/Pages/tg1202.aspx. 4  “Complexity, Concentration and Contagion”, which is forthcoming in the Journal of Monetary Economics, Vol 58 (5). 2  BIS central bankers’ speeches  develop a model of a banking network, inter-connected through unsecured interbank lending and secured funding markets. This financial web exhibits classical tipping point properties. It is even-tempered most of the time. Indeed, having a tight-knit circle of financial friends helps keep the financial system strong and stable. Risks are diffused across the system. A problem shared is a problem halved. The system is in a high-liquidity equilibrium. But, on occasion, the system can be pushed beyond its tipping point. Connectivity then generates contagion. A problem shared is a problem multiplied. The best of financial friends become the worst of enemies. In the model, one of the key channels for contagion is the secured financing market as banks hoard rather than lend liquidity when haircuts rise. The liquidity feast then turns to famine as secured and unsecured financing markets dry up.

15  See, for instance, ECB Financial Stability Review, June 2009, Special Feature C, “Balance sheet contagion and the transmission of risk in the euro area financial system”; Haldane (2009) “Rethinking the financial system network”, speech delivered at the Financial Student Association, Amsterdam, April. 6  BIS Review 115/2009  inferred data based on stock prices or credit default swap spreads that, in particular, might not behave reliably at times of turmoil or stress in financial markets. It is important to note that the complexities of systemic risk and macro-prudential supervision and the state of current research do not allow the analytical tool kit to be limited to just one or two major models. Given that the framework for macro-prudential analysis is at an early stage of development compared with other areas of economics, there is a need to look at a wider range of models and thereby include relevant risks, imbalances and transmission channels. Systemic risk analysis needs to be supported by a suite of state-of-the-art analytical models and tools, and a conceptual framework for using them. The complex and intertwined economic and financial linkages call for a constant cross-checking of several indicators or measures. In addition, the evolving nature of finance and the pace of innovation also require that the set of tools for systemic risk detection and assessment are constantly adjusted or revised. Many central banks, including the ECB, have in the past developed such models and tools in order to support their regular financial stability analyses and reports.