The multi-layer network nature of systemic risk and its implications for\n the costs of financial crises

The inability to see and quantify systemic financial risk comes at an immense\nsocial cost. Systemic risk in the financial system arises to a large extent as\na consequence of the interconnectedness of its institutions, which are linked\nthrough networks of different types of financial contracts, such as credit,\nderivatives, foreign exchange and securities. The interplay of the various\nexposure networks can be represented as layers in a financial multi-layer\nnetwork. In this work we quantify the daily contributions to systemic risk from\nfour layers of the Mexican banking system from 2007-2013. We show that focusing\non a single layer underestimates the total systemic risk by up to 90%. By\nassigning systemic risk levels to individual banks we study the systemic risk\nprofile of the Mexican banking system on all market layers. This profile can be\nused to quantify systemic risk on a national level in terms of nation-wide\nexpected systemic losses. We show that market-based systemic risk indicators\nsystematically underestimate expected systemic losses. We find that expected\nsystemic losses are up to a factor four higher now than before the financial\ncrisis of 2007-2008. We find that systemic risk contributions of individual\ntransactions can be up to a factor of thousand higher than the corresponding\ncredit risk, which creates huge risks for the public. We find an intriguing\nnon-linear effect whereby the sum of systemic risk of all layers underestimates\nthe total risk. The method presented here is the first objective data driven\nquantification of systemic risk on national scales that reveal its true levels.\n