The inability to see and quantify systemic financial risk comes at an immense social cost. Systemic risk in the financial system arises to a large extent as a consequence of the interconnectedness of its institutions, which are linked through networks of different types of financial contracts, such as credit, derivatives, foreign exchange and securities. The interplay of the various exposure networks can be represented as layers in a financial multi-layer network. In this work we quantify the daily contributions to systemic risk from four layers of the Mexican banking system from 2007-2013. We show that focusing on a single layer underestimates the total systemic risk by up to 90%. By assigning systemic risk levels to individual banks we study the systemic risk profile of the Mexican banking system on all market layers. This profile can be used to quantify systemic risk on a national level in terms of nation-wide expected systemic losses. We show that market-based systemic risk indicators systematically underestimate expected systemic losses. We find that expected systemic losses are up to a factor four higher now than before the financial crisis of 2007-2008. We find that systemic risk contributions of individual transactions can be up to a factor of thousand higher than the corresponding credit risk, which creates huge risks for the public. We find an intriguing non-linear effect whereby the sum of systemic risk of all layers underestimates the total risk. The method presented here is the first objective data driven quantification of systemic risk on national scales that reveal its true levels.

Capturing financial network linkages and contagion in stress test models are important goals for banking supervisors and central banks responsible for micro-and macroprudential policy. However, granular data on financial networks is often lacking, and instead the networks must be reconstructed from partial data. In this paper, we conduct a horse race of network reconstruction methods using network data obtained from 25 different markets spanning 13 jurisdictions. Our contribution is two-fold: first, we collate and analyze data on a wide range of financial networks. And second, we rank the methods in terms of their ability to reconstruct the structures of links and exposures in networks.

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Financial Market Infrastructures (FMIs) are essential for the well-functioning of the financial system, as they play a central role in facilitating clearance and settlement of financial transactions such as payments, securities, and derivatives contracts. Nowadays, it is widely acknowledged that the proper functioning of systemically important FMIs is also vital to maintain financial stability; their failure for solvency reasons or operational disruptions could almost certainly lead to systemic instability. As a consequence, the adequate supervision of FMIs is inherent to the function of preserving financial stability. The aim of this chapter is to provide a general overview of the different FMIs; discuss their role in financial stability and to give an overview of the efforts made by some financial authorities towards the supervision, risk assessment and reinforcement of FMIs.

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