This paper investigates how interbank credit exposures affect financial stability. Policy makers often see such exposures as undermining stability by exacerbating cascading losses through the financial system. I develop a model that features a trade-off between cascading losses and risk-sharing....

Over the last two decades, default rates and market risk have increased substantially. A consequence of the growing global interlacing is a strong dependence between both individual stock returns and credit events. Risk management (especially risk diversification) is much more challenging,...