  We test the hypothesis that interconnections across financial institutions
can be explained by a diversification motive. This idea stems from the
empirical evidence of the existence of long-term exposures that cannot be
explained by a liquidity motive (maturity or currency mismatch). We model
endogenous interconnections of heterogenous financial institutions facing
regulatory constraints using a maximization of their expected utility. Both
theoretical and simulation-based results are compared to a stylized genuine
financial network. The diversification motive appears to plausibly explain
interconnections among key players. Using our model, the impact of regulation
on interconnections between banks -currently discussed at the Basel Committee
on Banking Supervision- is analyzed.

Risk Management;Applications