Workshop on Challenges in Interconnected Financial Systems
Links between households, firms, and financial institutions help channel credit, reallocate capital, and share risks in the economy. At the same time, links can transmit, and even amplify, negative economic shocks throughout the financial system as a result of cross-holdings and counterparty exposures. The propagation of shocks may cause contagion and lead to cascading failures in the system, imposing high costs to society.
Financial integration, globalization, and developments in information technology have increased interconnectedness and interdependency in the financial system. Integration leads to various economic and financial challenges for policy-makers, regulators, and central banks. This calls for new research to understand the role and consequence of financial interconnectedness in formal and informal financial networks.