An International Monetary Fund paper published on Tuesday shows that the high correlation between insolvencies of large banks and smaller banks raises systemic risk in the banking sector.

Liliana Schumacher and Theodore Barnhill, the paper’s authors, propose a forward-looking simulation methodology to estimate the magnitude and probability of correlated solvency and liquidity risks in the banking system, and its impact on the real economy. In the model, banks fail from a solvency perspective