Drawing on the details in case study material, explain how interbank connections can affect the exposure of individual banks and the banking system to liquidity risk.

Interbank Contagion during the Depression

https://voxeu.org/article/interbank-contagion-during-depression

After reading the case study material “Interbank Contagion during the Depression and its implications for Regulation today” answer the following questions:

1. Drawing on the details in case study material, explain how interbank connections can affect the exposure of individual banks and the banking system to liquidity risk.

2. Use economic theory and the evidence provided in the case study material to assess the effects on the banking system of a central banker that acts as the lender of the last resort.

3. Discuss whether regulations in addition to a lender of the last resort are needed for the efficient operation of the financial system.