May, R, Levin, S.A and Sugihara, G (2008), “Complex systems: Ecology for bankers”, Nature Vol. 451: 893-895. McKercher, B and Chon, K (2004), “The over-reaction to SARS and the collapse of Asian tourism”, Annals of Tourism Research 31(3): 716-719. Milgram, S (1967), “Small-world problem”, Psychology Today 1(1): 61-67. Newman, M (2003), “The structure and function of complex systems”, arXiv:condmat/0303516v1. Newman, M (2008), “The physics of networks”, Physics Today: 33-38. BIS Review 53/2009  19  Nier, E, Yang, J, Yorulmazer, T and Alentorn, A (2008), “Network Models and Financial Stability”, Bank of England Working Paper No.346. NYU Stern School of Business (2008), Repairing the US Financial Architecture: An Independent View. Pikitch, E.K, Santora, C , Babcock, E.A, Bakun, A, Bonfil, R, Conover, D.O, Dayton, P, Doukakis, P, Fluharty, D, Heneman, B, Houde, E.D, Link, J, Livingston, P.A, Mangel, M McAllister, M.K, Pope, J and Sainsbury, K.J (2004), “Ecosystem-Based Fishery Management”, Science Magazine, Vol. 305: 346-347. Porterie, B, Kaiss, A, Clerc, J-P and Zekri, L and Zekri, N (2008), “Universal scaling of forest fire propagation”, eprint arXiv:0805.3365. President’s Working Group (2008), Initiatives to strengthen OTC derivatives oversight and infrastructure, available at http://www.ustreas.gov/press/releases/hp1272.htm. Pröpper, M, van Lelyveld, I and Heijmans, R (2008), “Towards a network description of interbank payment flows”, DNB Working Paper No. 177. Simon, H (1962), “The architecture of complexity”, Proceedings of the American Philosophical Society, Vol. 106, No. 6: 467-482.

The level playing field resulted in everyone playing the same game at the same time, often with the same ball. Through these channels, financial sector balance sheets became homogenised. Finance became a monoculture. In consequence, the financial system became, like plants, animals and oceans before it, less disease-resistant. When environmental factors changed for the worse, the homogeneity of the financial eco-system increased materially its probability of collapse. So where does this leave us? With a financial system exhibiting, for individually quite rational reasons, increasing complexity and homogeneity. A network which, in consequence, was robust-yet-fragile. A network predisposed to tipping points and discontinuities, even for small shocks. A network which, like Tolstoy’s unhappy families, could be unhappy in quite different ways. A network mostly self-repairing, but occasionally self-destructing. A network which, like the little girl with the curl, when the going was good was very, very good – but when it turned bad was horrid. Part 2: Improving network stability This is a gloomy prognosis: a financial system teetering between triumph and disaster. Unlike Kipling, policymakers in practice are unlikely to treat those two imposters just the same. Recent events have rather illustrated that. Public interventions in the financial system during this crisis – through liquidity injections, capital injections or public sector guarantees – already total in excess of £ trillion. 22 So what could be done to protect the financial network from future such dynamics? And are there lessons from other network disciplines which might help inform these efforts?