Addressing Interconnectedness: Concepts and Prudential Tools

Abstract

This paper reviews tools used to identify and measure interconnectedness and raises the awareness of policymakers as to potential cross-sectional implications of prudential tools aimed at controlling interconnectedness. The paper examines two sets of tools developed at the IMF and externally to identify the implications of interconnectedness in systemic risk and how these tools have been applied in IMF surveillance. The paper then proposes a preliminary framework to analyze some key internationally-agreed-upon and national prudential tools and finds that while many prudential tools are effective in reducing interconnectedness, the interaction among these tools is far less clear cut.