Systemic risk can spread rapidly through interconnected financial markets, where a failure at a single institution can trigger a domino effect of counterparty defaults across the wider economy.
The Interbank Contagion Pipeline
Central bank macroprudential teams use network modeling to map and analyze these interbank vulnerabilities:
[Primary Large Bank Defaults] 
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[Wipes Out Outstanding Interbank Claims] ---> Triggers liquidity shortages at counterparty banks
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           v
[Asset Fire Sales Activated to Raise Cash] --> Depresses asset valuations across the sector
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[Systemic Interbank Financial Collapse] ------> Realizes systemic contagion damage

By mapping lending networks and calculating the financial impact of simulated defaults, central banks can identify systemic vulnerabilities and implement targeted liquidity requirements to isolate failures before they trigger a wider collapse.
 
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