Externalities related to interconnectedness can arise because intermediaries are linked through bilateral balance sheet exposures or on the derivatives market, or because they are jointly exposed to common shocks. Ownership links between intermediaries might require the provision of liquidity support in case of fund distress, either because of existing guarantees or committed credit lines, but also with a view to avoiding reputational damage.
Lessons from COVID-19 Stress on the Financial System” (speech at the Institute of International Finance, Washington, D.C. (via webcast), October 15, 2020), https://www.federalreserve.gov/newsevents/speech/quarles20201015a.htm. 12 See note 8, Board of Governors of the Federal Reserve System, news release, March 19, 2021.