The Butterfly Defect: Why globalization creates systemic risks and what to do about it

Abstract

Global interconnectedness can yield significant benefits, but can also create new systemic risks. In a globalised world, systemic risk creates vulnerabilities such that a single node in a network has the capacity to disrupt the entire global system. Such vulnerability was illustrated during the 2008 financial crisis, when the collapse of a single financial institution had reverberating consequences across the world's financial system. Six policy steps are proposed to address systemic risk inherent in an interconnected world.