No system can be seen properly by looking at its parts. This is why modern medicine fails to make any headway in helping us cope with chronic illness (The Theme of book 3 - You Dont Need Medicine to be Healthy).
Recent research makes this case for Banking regulation as well.
"Banking systems now need similar scrutiny, May explained, because regulations have since the late 1980s typically focused on minimizing risk for individual banks at the expense of the wider financial world.
Large institutions have been free to expand their activities, May said. At the same time, those big institutions were permitted before the crisis to maintain financial reserves proportionately less than those held by small banks on the reasoning that the sheer size of a larger bank's holdings would be more resilient to economic tumult.
"The need to analyze financial systems -- as distinct from the operation of individual banks, one-by-one -- is making itself increasingly obvious," May said. "Individual banks have tended to become more diverse in their activities, but the system as a whole has become less diverse. In short, there is a tension between what might be best for each individual bank and what might be best for the system as a whole."
If the financial world were an ecosystem, large banks would be like a "keystone species," Arinaminpathy said. These species' importance extends beyond their biomass, or the collective weight of resident individuals, he said. For instance, a typical elephant herd can weigh several hundred tons, but the effect it has on the grasslands on which the animals graze has a cascading impact on other species that exceeds their physical presence.
"For large banks, we're not just looking at their individual size but the role they play in the financial network as a whole," Arinaminpathy said.
When it comes to the spread of financial disease, large banks can act as a "super spreader," a sick individual that can spread a contagion widely, Arinaminpathy said. An example is the contagious person whose infection spreads easily in the tight confines of a long flight. Likewise, multinational banks have numerous close financial ties that speed transmission. But while isolation can stem a biological virus, financial "contagions" feed on anxiety.
"An important distinction from biological disease is that financial contagions become more virulent and transmissible the more anxious people become," Arinaminpathy said. "We capture the well-observed phenomenon that a loss of confidence creates a cycle of financial and psychological insecurity. The worse confidence gets, the more severe those financial shocks get."
Now this is systems thinking at its best! Book 2 You Don't Need a Banker - To Get Credit goes deeper and shows you the new system that will emerge to replace the one we have.