Uncovering Systemic Structures:

Building Causal Loop Diagrams

 Case Study 1
• Title: The Collapsing Banks
• Purpose: To build a causal loop diagram
• Outcome:
– A causal loop diagram
 The Collapsing Banks
Throughout its history, the United States has suffered periodic rashes of bank
failures. During these episodes, depositors seemed to lose confidence in a bank
and began withdrawing their funds. If word of this worry got around, more and
more depositors lost confidence, and more and more funds were withdrawn from
banks.
Eventually, the volume of these withdrawals threatened the solvency of the
bank, and when bank funds fell too low, the bank failed.
Worse yet, the failure of one bank could trigger a rash of other bank failures.
Over the course of several months, depositors at other banks got nervous when
they heard about the failure of the first bank, whether they had any reason to
worry about their own banks or not. So they withdrew their funds from their
banks, and, if funds got low enough, these banks, too, lost solvency and failed.
 Building A Causal Loop Diagram
1. Formulate the Problem
 The problem is that many banks were failing over the course
of several months.
2. Teel the Story
 As depositors lost confidence in their banks, they withdrew
their funds, and the banks began failing in a kind of domino
effect. As more and more banks failed, depositors lost even
more confidence and withdrew yet more funds. Then, even
more banks failed.
3. Choose Your Key Variables, and Name Them Precisely
 Bank Failures
 Bank Solvency
 Funds withdrawals
 Depositors’ confidence
4. Graph the Key Variables’ Behavior Over Time
5. Drawing a causal loop diagram:
 Begin at the Beginning
 Work Backward
 Go Back and Forth
 BOT for Case 1
BACK

Bank Solvency

Depositors’ Confidence

Funds Withdrawals

Bank Failures

Two Years
 Begin At The Beginning
• Starts with “Depositors’ confidence” as variable (A),
what comes next? Which variable is directly affected by
the loss of confidence?

Depositors’ Confidence (A)

• When depositors’ confidence (A) dropped,

withdrawals of funds (B) increased.

Depositors’ Confidence (A) This sign (-) indicated a change

in A produces a change in B in
the opposite direction.

-
Withdrawals of Funds (B)
 Begin At The Beginning (Cont)
• When withdrawals of funds (B) increased, banks’
solvency (C) decreased.
Depositors’ Confidence (A) This sign (-) indicated a change
in A produces a change in B in
the opposite direction.

-
Withdrawals of Funds (B)

This sign (-) indicated a change

- in B produces a change in C in
Bank Solvency (C)
the opposite direction.
 Begin At The Beginning (Cont)
• When banks’ solvency declined, bank failures (D)
increased.
Depositors’ Confidence (A) This sign (-) indicated a change
in A produces a change in B in
the opposite direction.

-
Bank Failures (D) Withdrawals of Funds (B)
-
This sign (-) indicated a change
- in B produces a change in C in
Bank Solvency (C)
the opposite direction.

This sign (-) indicated a change

in C produces a change in D in
the opposite direction.
 Begin At The Beginning (Cont)
• Finally, check the link between the increase in bank
failures (D) and a further decline in depositors’
confidence.
This sign (-) indicated a change
in D produces a change in A in
the opposite direction.
Depositors’ Confidence (A) This sign (-) indicated a change
in A produces a change in B in
- the opposite direction.

-
Bank Failures (D) Withdrawals of Funds (B)
-
This sign (-) indicated a change
- in B produces a change in C in
Bank Solvency (C)
the opposite direction.
This sign (-) indicated a change
in C produces a change in D in
the opposite direction.
 Work Backward
• Start with problem symptom and work backward to
assemble the loop diagram.
• Problem symptom is bank failures (1), of the
identified variables, which one leads most directly to
increasing bank failures (1)?
Bank Failures (1)
 Work Backward (Cont.)
• Decreasing solvency (2) is leads most directly to
increasing bank failures.
This sign (-) indicated a change
in 2 produces a change in 1 in
the opposite direction. Bank Failures (1)
-

Bank Solvency (2)

 Work Backward (Cont.)
• Withdrawals of funds (3) then lead directly to
decreasing solvency (2).
This sign (-) indicated a change
in 2 produces a change in 1 in
the opposite direction. Bank Failures (1)
-

Bank Solvency (2)

-
Withdrawals of Funds (3)

This sign (-) indicated a change

in 3 produces a change in 2 in
the opposite direction.
 Work Backward (Cont.)
• Increasing funds withdrawals (3) resulted from
declining depositors confidence (4).
This sign (-) indicated a change
in 2 produces a change in 1 in
the opposite direction. Bank Failures (1)
-

Bank Solvency (2) Depositors’ Confidence (4)

-
-
Withdrawals of Funds (3)

This sign (-) indicated a change This sign (-) indicated a change
in 3 produces a change in 2 in in 4 produces a change in 3 in
the opposite direction. the opposite direction.
 Work Backward (Cont.)
• Finally, what is the connection, if any, between
declining depositors confidence (4) and the rising
number of bank failures (1), the lower depositors’
Thisconfidence.
sign (-) indicated a change
This sign (-) indicated a change
in 2 produces a change in 1 in
Bank Failures (1) in 1 produces a change in 4 in
the opposite direction.
the opposite direction.
-
-
Bank Solvency (2) Depositors’ Confidence (4)

- This sign (-) indicated a change

- in 4 produces a change in 3 in
Withdrawals of Funds (3) the opposite direction.

This sign (-) indicated a change

in 3 produces a change in 2 in
the opposite direction.