Macro-prudential tools can reduce interbank contagion risk, safeguarding financial stability.
The article examines how certain rules and regulations in the banking system can help prevent the spread of risks between banks. By studying how banks interact with each other, researchers found that policies like large exposure limits and capital requirements can make the banking system more resilient to shocks. Focusing only on direct connections between banks may underestimate the true risks of contagion. It is important for regulators to have detailed data on all bank interactions to effectively manage systemic risks in the financial system.