The specific set of tools analysed are those designed to contain the "cross-sectional" dimension of systemic risk – that is, those designed to limit the systemic risk stemming from factors such as correlations and common exposures across financial institutions. These include tools such as large exposure limits and other regulatory requirements designed to limit the spread of systemic risk between banks. The analysis rests on the basic notion that interbank network structures, and hence the risk of contagion across the banking system in response to shocks, are influenced by banks’ optimising behaviour subject to regulatory (and other) constraints. Changes in macro-prudential policy parameters, such as large exposure limits, capital charges on counterparty exposures and capital and liquidity requirements more generally, will affect the contagion risk because of their impact on banks’ asset allocation and interbank funding decisions. This in turn implies that well-tailored macro-prudential policy can help reduce interbank contagion risk by making network structures more resilient. The analysis shows that to capture the full extent of potential interbank contagion, all of the different layers of bank interaction should be taken into account. Hence, if the regulator only focuses on one segment of interbank relationships (e.g. direct bilateral exposures), the true contagion risks are likely to be grossly underestimated. This finding has clear policy implications and flags the importance of micro- and macro-prudential regulators having access to sufficiently detailed data so as to be able to map the many interactions between banks. While the global financial crisis has seen many phases, a main feature has been the interplay of risks across various economic and financial sectors, even culminating in outright risk transfer in some cases. Prominent examples have included the spillover of fragilities from the financial sector to the broader economy and from the banking sector to the sovereign sector. In monitoring the propensity for such phenomena to occur and in evaluating their impact, direct (i.e. accounting) linkages tend to understate risks. Earlier and more robust signals of the possibility for cross-sectoral linkages to cause systemic stress can be obtained via contingent claims analysis (CCA), which augments cross-sectoral linkages on the basis of the main tenets of financial option pricing. A popular financial services model in Europe is a melding of banking and insurance activities together under one roof – or so-called bancassurance groups. These arrangements can yield many benefits, including economies of size and scope, and sectoral diversification can reduce income and balance sheet volatility. The financial crisis, however, also highlighted the fragilities of this model, with recourse to state aid by several financial groups with significant banking and insurance activities. First, the complexity and the inherent opacity of the structure pose challenges in terms of risk management, market discipline and supervisory control. Second, the multiple use of regulatory capital may overstate the capacity of a group to absorb losses – either across the various regulated entities within the group (double or multiple gearing) or through the use of debt issued at the holding company level to acquire equity stakes in subsidiaries (double leverage).