Cross-border financial linkages and financial stability Cross-border financial linkages can have important implications for financial stability when large institutions react in a similar manner and herding behaviour causes financing flows to amplify financial market shocks. We have seen this desperate search for yield across borders many times before with investors taking on more and more risk and in doing so significantly lowering risk premia.
Rather than requiring higher risk premia from increasingly leveraged borrowers, investors continue to provide financing at declining spreads, fearful of missing out on the returns of those who preceded them.