. derivatives positions and net foreign currency positions are also imperfectly captured in global flows of funds data, particularly for companies. for example, over recent years many emerging market companies have borrowed cheaply in dollar - denominated instruments. but gauging the scale of that borrowing, and whether it is hedged either with derivatives or dollar income receipts, is a real data challenge. this is a significant gap because unhedged dollar borrowing is one potential fault - line in the international financial system at present ( bis ( 2014 ) ). ( b ) modelling once the necessary data is in place, a natural next question is how best to use this to understand the dynamics of the macro - financial system of systems. there are a number of potentially fruitful, if fledgling, avenues of research currently being pursued on that front. in making sense of the macro - financial system, it would be desirable to have a quantitative framework for understanding and evaluating interactions both within the financial system and between it and the wider economy. pre - crisis, such models were close to non - existent. indeed, many mainstream macro - economic models did not even contain a well - defined financial sector, much less interactions within it ( roger and vleck ( 2011 ) ). the bank of england was an early pioneer of an approach which placed the financial sector centre - stage, with its so - called ramsi ( risk assessment model of systemic institutions ) model ( burrows et al ( 2012 ) ). a stylised overview of ramsi is given in chart 16. ramsi embodies interactions between the elements of individual banks ’ balance sheets ( the microprudential layer ), between individual banks ( the macro - prudential layer ) and between the financial system and the economy ( the macro - economic layer ). as an example, ramsi embodies an interbank network which allows counterparty network contagion to propagate. it also contains a behavioural model of funding markets and banks ’ liquidity positions which can generate liquidity crisis externalities ( aikman et al ( 2009 ) ). there are also explicit behavioural links between macro - economic variables and bank balance sheets ( through arrears, defaults, losses given default etc ). these complex, non - linear bis central bankers ’ speeches channels of risk propagation mean the probability distributions generated from ramsi are fat - tailed ( chart 17 ). these ingredients, with rich interactions both within and across banks and between banks and the

pieces of the policy jigsaw fit together as a whole. this is a potentially promising avenue. the financial crisis has led to a fundamental reshaping of the macro - financial policy architecture. in some areas, regulatory foundations have been fortified – for example, in the micro - prudential regulation of individual financial firms. in others, a whole new layer of policy has been added – for example, in macro - prudential regulation to safeguard the financial system as a whole ( hanson, kashyap and stein ( 2010 ) ). this new policy architecture is largely untried, untested and unmodelled. this has spawned a whole raft of new, largely untouched, public policy questions. why do we need both the micro - and macro - prudential policy layers? how do these regulatory layers interact with each other and with monetary policy? and how do these policies interact at a global level? answering these questions is a research agenda in its own right. without answering those questions, i wish to argue that complexity theory might be a useful lens through which to begin exploring them. the architecture of complex systems may be a powerful analytical device for understanding and shaping the new architecture of macro - financial policy. modern economic and financial systems are not classic complex, adaptive networks. rather, they are perhaps better characterised as a complex, adaptive “ system of systems ” ( gorod et al ( 2014 ) ). in other words, global economic and financial systems comprise a nested set of sub - systems, each one themselves a complex web. understanding these complex subsystems, and their interaction, is crucial for effective systemic risk monitoring and management. this “ system of systems ” perspective is a new way of understanding the multi - layered policy architecture which has emerged since the crisis. regulating a complex system of systems bis central bankers ’ speeches calls for a multiple set of tools operating at different levels of resolution : on individual entities – the microscopic or micro - prudential layer ; on national financial systems and economies – the macroscopic or macro - prudential and monetary policy layer ; and on the global financial and economic system – the telescopic or global financial architecture layer. the architecture of a complex system of systems means that policies with varying degrees of magnification are necessary to understand and moderate fluctuations. it also means that taking account of interactions between these layers is important when gauging risk. for example, the crisis laid bare the costs of ignoring systemic risk when setting micro -