II. Connectedness in the Crisis

This part of the book discusses connectedness. In chapter 4, I examine the 2008 Lehman bankruptcy and conclude that connectedness of other institutions to Lehman did not create systemic risk. In chapter 5, I turn to liability connectedness. I first examine whether the connectedness of money market funding to banks caused a problem in the crisis, concluding that it did not. I then examine a possible future source of connectedness, the tri-party repo market. While this market could cause systemic risk, it has been altered in significant ways to avoid this possibility. In chapter 6, I discuss some key provisions of Dodd–Frank that address connectedness: central clearing, exposure limitations, and SIFI designation.