Regulatory intervention fuels excessive bank interconnections, risking financial contagion.
The article explores why banks form financial connections during crises. It looks at how banks decide to link up with each other, weighing the benefits against the risks of financial contagion. The researchers focus on two main reasons for excessive interconnections: deposit insurance and the "too big to fail" issue. They use a model to show how these factors can lead to banks being overly interconnected, as seen during past financial crises.