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The inability to see and quantify systemic financial risk comes at an immensesocial cost. Systemic risk in the financial system arises to a large extent asa consequence of the interconnectedness of its institutions, which are linkedthrough networks of different types of financial contracts, such as credit,derivatives, foreign exchange and securities. The interplay of the variousexposure networks can be represented as layers in a financial multi-layernetwork. In this work we quantify the daily contributions to systemic risk fromfour layers of the Mexican banking system from 2007-2013. We show that focusingon a single layer underestimates the total systemic risk by up to 90%. Byassigning systemic risk levels to individual banks we study the systemic riskprofile of the Mexican banking system on all market layers. This profile can beused to quantify systemic risk on a national level in terms of nation-wideexpected systemic losses. We show that market-based systemic risk indicatorssystematically underestimate expected systemic losses. We find that expectedsystemic losses are up to a factor four higher now than before the financialcrisis of 2007-2008. We find that systemic risk contributions of individualtransactions can be up to a factor of thousand higher than the correspondingcredit risk, which creates huge risks for the public. We find an intriguingnon-linear effect whereby the sum of systemic risk of all layers underestimatesthe total risk. The method presented here is the first objective data drivenquantification of systemic risk on national scales that reveal its true levels.

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