What are cascades in financial networks?
Cascades in financial networks is an expression that describes a situation in which the failure of one financial institution has a knock-on effect leading to the failure of other institutions. This 'cascading' of failure could threaten the entire financial system.
Where have you heard about cascades in financial networks?
As an investor, you may have read articles about the threat of a cascade in the financial system, and you may have come across references to such cascades in histories of the 2008 crisis. Your financial adviser may have alerted you to the danger at one time or another of a cascade.
What you need to know about cascades in financial networks.
Few if any financial institutions stand entirely alone. In finance, more than most industries, different entities are closely connected, which means the failure of one can lead to the failure of others. It is said that three factors have to be present for a cascade to be a real danger. The first is that a financial institution has failed. The second is that the failure proves contagious and cannot be isolated within the failed institution. The third is that the connections are there in the system through which the 'contagion' can spread.
Find out more about cascades in financial networks.
Cascades in financial networks can, in the worst case, create systemic risk. Learn more about systemic risk here.