Charles Calomiris, Matthew Jaremski, David Wheelock, 12 February 2019

Banks have direct contractual exposures to one another through a variety of channels, and regulators are concerned about the systemic risk that may result from this. This column examines the Great Depression in the US and describes how important contractual contagion occurred during the Depression which significantly worsened the failure risk of banks by increasing liquidity risk. The findings call for regulatory policies that take account of potential contractual contagion, and that require minimum prudential capital and liquidity buffers to take liquidity risks into account.

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