The Role of Interconnectedness in the Financial Contagion of the Interbank of Germany in 2007

The collapse of the US housing market, which had cascading effects and spread to interbank lending markets, was what sparked the German financial crisis in late 2007. In light of this, the purpose of this paper is to investigate how interconnection influenced interbank financial contagion in 2007. This paper followed the methodology of first outlining the case study, covering the causes and effects of the financial crisis, and then assessing the effects of interconnection on the contagion process; finally, recommendations for future policymakers were developed and evaluated. The main conclusion was that interconnectedness makes it easier for systemic risks and liquidity shortages to happen in financial institutions. To make banks more resilient to shocks, the solutions were to lower the concentration of the banking sector and raise bank equity and transparency. The primary objective of this study was to validate the function of interconnectedness and networks in establishing a transmission channel for contagion, as well as to give recommendations to policymakers on potential future regulatory policies and actions.