Modeling a Layered Financial Structure in a Knowledge Economy

A layered financial structure is the key institutional feature of the financial subsystem of a knowledge economy. The concept was introduced by Irving Minsky and has been proven the empirical key in understanding bank panics, such as the global financial crisis of 2007–2008. However, even after such crisis, the operations of the shadow-banking layer of the structure continue to provide major financial perturbations—such as major trading losses in integrated banks. We develop a graphic model of a layered-financial system and explore how financial technology alters the processes in such structures, particularly in increasing financial instability. We use it to analyze the large trading loss by JP Morgan Chase in 2012. Copyright Springer Science+Business Media New York 2014