Abstract for: Financial Instability through the Eyes of the Federal Reserve Bank Supervisors

Recent series of deep disturbances to the global financial system highlight the need for a systems approach to the analysis of financial instability. The latest financial crisis provided many examples of significantly destabilizing dynamic processes affecting the behavior of the financial system that clearly indicate that the fragility of the financial system is structural. Therefore, to understand financial fragility, it is critical to elicit the structure of the financial sector. A common practice in the field of economics is to create theoretical models without the practitioners input. Yet the professionals who work in the financial sector poses the deep knowledge of the system. The objective of this project is to contribute to the effort of constructing a unifying theoretical framework of systemic feedbacks within financial systems. This project constructs a shared mental model of the Federal Reserve Bank supervisors that captures their understanding of the financial instability. To the best of our knowledge, their views have never been explicitly documented before. This gives the voice to the expert group that is usually not part of the academic conversation about financial stability, although these experts possess the first-hand knowledge about the topic.