Study reveals interbank market structure may amplify financial contagion risk
Interbank markets in Italy can spread financial problems from one bank to another. Researchers studied how this happens using real data on bank connections. They compared two ways of predicting contagion: one based on maximum entropy and one based on actual connections. They found that the maximum entropy method can sometimes overestimate how much contagion can spread, depending on how banks are connected and how strong they are financially.