A published report by the Hong Kong Monetary Authority titled "Analyzing Interconnectivity Among Economies" found that the trend of financial globalization has weakened the world economy by making it vulnerable to systemic collapse resulting from external shocks. The report goes on to state that individual countries have lost control over their own economic security as a result of this financial interconnectivity, creating policy problems for government leaders and central bankers. One of the major findings of the report was that "economies register a significantly higher sovereign risk once the condition that another economy is in distress is imposed." The problem is that traditional CDS pricing does not correctly price this risk, leaving market participants exposed to billions in potential losses. The threat becomes more severe if systemically important institutions like money center banks are affected by this mispricing of risk because of the domino effect during financial crises.
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