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Modular scale-free architecture of Colombian financial networks: Evidence and challenges with financial stability in view


  • Carlos León


  • Ron J. Berndsen



Scale-free (inhomogeneous) connective structures with modular (highly clustered) hierarchies are ubiquitous in real–world networks. Evidence from the main Colombian payment and settlement systems verifies that local financial networks have self-organized into a modular scale-free architecture that favors everyday robustness and performance in exchange for rare episodes of fragility but rapid evolution. Results provide new elements for understanding and modeling the formation and structure of financial networks, and suggest new insights and challenges for authorities contributing to their stability. For instance, (i) the observed architecture suggests that financial systems are complex adaptive systems; (ii) complex adaptive features invalidate traditional reductionist assumptions for modeling financial systems (e.g. homogeneity, normality, static equilibrium, linearity); (iii) the observed modular scale-free architecture tends to limit cascades and isolate feedbacks; and (iv) with financial stability in view, authorities should understand and take advantage of the existing architecture by means of designing and implementing macro-prudential regulation and system-calibrated requirements. Yet, the quest for discovering, explaining and handling the emerging structure of financial systems is an enduring task.

Suggested Citation

  • Carlos León & Ron J. Berndsen, 2013. "Modular scale-free architecture of Colombian financial networks: Evidence and challenges with financial stability in view," BORRADORES DE ECONOMIA 011104, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:011104

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    References listed on IDEAS

    1. Carlos Léon & Clara Machado & Freddy Cepeda & Miguel Sarmiento, 2011. "Too-connected-to-fail Institutions and Payments System’s Stability: Assessing Challenges for Financial Authorities," Borradores de Economia 644, Banco de la Republica de Colombia.
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    Cited by:

    1. Carlos León & Clara Machado & Andrés Murcia, 2013. "Macro-prudential assessment of Colombian financial institutions’ systemic importance," Borradores de Economia 800, Banco de la Republica de Colombia.
    2. Carlos León & Clara Machado & Miguel Sarmiento, 2014. "Identifying central bank liquidity super-spreaders in interbank funds networks," Borradores de Economia 816, Banco de la Republica de Colombia.
    3. Carlos Castro & Juan S. Ordoñez & Sergio Preciado, 2016. "Network externalities across financial institutions," DOCUMENTOS DE TRABAJO 014287, UNIVERSIDAD DEL ROSARIO.
    4. Carlos León, 2014. "Scale-free tails in Colombian financial indexes: a primer," BORRADORES DE ECONOMIA 011144, BANCO DE LA REPÚBLICA.

    More about this item


    Networks; complex adaptive systems; self-organization; financial system; scale-free; financial stability;

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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