Financial Linkage, Systemic Risk, and Financial Stability: A Conceptual Study on Commercial Banks

Abstract

This study aims to analyze the relationship between financial linkage, systemic risk, and financial stability in commercial banks through a literature review approach. This study integrates macroprudential theory and the results of recent empirical research to explain how interbank linkages can improve liquidity efficiency while magnifying the potential for systemic risk in the modern financial system. Based on the results of a literature review, systemic risk has been proven to play a role as a mediating variable that links financial linkage with financial stability. The higher the level of interconnectedness between financial institutions, the greater the likelihood of risk transmission that can threaten overall financial stability. Therefore, this study confirms the importance of comprehensive and adaptive macroprudential policies to maintain a balance between interconnection efficiency and financial system resilience. These findings make a conceptual contribution to the development of subsequent empirical models that focus on the analysis of financial linkages and systemic risks in the general banking sector