Explain the concept of credit contagion and how it can impact a bank's lending portfolio during a financial crisis.

Credit contagion, also known as credit risk contagion, is a phenomenon where the failure of one borrower or financial institution can trigger a domino effect of defaults and financial distress among other borrowers and institutions. This occurs due to interconnectedness in the financial system, where borrowers and lenders are linked through various financial instruments like loans, bonds, derivatives, and other forms of credit. Here's how credit contagion can impact a bank's lending portfolio during a financial crisis: 1. Interbank lending: Banks lend to each other in the interbank market. If one bank fails, it can trigger a chain reaction as other banks who lent to the failed bank face losses, leading to liquidity shortages and further defaults. This can force banks to cut back on lending, even to healthy borrowers, lea....