We have seen how interconnectedness can be a source of strength for financial institutions, allowing them to diversify risk while providing liquidity and investment opportunities to savers that would not be available otherwise.
But more-numerous and more-complex linkages also appear to make it more difficult for institutions to address certain types of externalities, such as those arising from incomplete information or a lack of coordination among market participants. These externalities may do little harm or may even be irrelevant in normal times, but they can be devastating during a crisis.