This paper explores the potential for financial crises to spread from one institution to another through a network of financial contracts, focusing on the interbank market, payments system, and derivatives market. It highlights the importance of central bank intervention in managing systemic risk, particularly in preventing speculative gridlocks and ensuring the stability of the banking system. The authors construct a model to analyze the propagation of financial crises, considering both liquidity and solvency shocks affecting financial intermediaries. They find that while interbank credit lines reduce the cost of holding liquid assets, they also make the system more vulnerable to speculative gridlocks. The paper also discusses the role of the central bank as a "crisis manager," emphasizing the need for coordination and supervision to prevent contagious failures. The results suggest that the structure of financial flows, such as credit chain and diversified lending, affects the system's resilience to market discipline and the risk of contagion.This paper explores the potential for financial crises to spread from one institution to another through a network of financial contracts, focusing on the interbank market, payments system, and derivatives market. It highlights the importance of central bank intervention in managing systemic risk, particularly in preventing speculative gridlocks and ensuring the stability of the banking system. The authors construct a model to analyze the propagation of financial crises, considering both liquidity and solvency shocks affecting financial intermediaries. They find that while interbank credit lines reduce the cost of holding liquid assets, they also make the system more vulnerable to speculative gridlocks. The paper also discusses the role of the central bank as a "crisis manager," emphasizing the need for coordination and supervision to prevent contagious failures. The results suggest that the structure of financial flows, such as credit chain and diversified lending, affects the system's resilience to market discipline and the risk of contagion.