interconnectedness of financial institutions

Financial institutions are interconnected like a web; they depend on each other through loans, investments, and transactions. For example, a bank may lend money to a company, which then deposits earnings back into another bank. If one institution faces financial trouble, it can affect others connected through these relationships, potentially causing a chain reaction. This interconnectedness helps ensure efficient flow of money and stability but can also amplify risks if vulnerabilities spread. Understanding these links highlights the importance of regulation and oversight to maintain the overall health of the financial system.