Interbank network and bank bailouts: insurance mechanism for non-insured creditors : [Version 10 April 2012]
- This paper presents a theory that explains why it is beneficial for banks to engage in circular lending activities on the interbank market. Using a simple network structure, it shows that if there is a non-zero bailout probability, banks can significantly increase the expected repayment of uninsured creditors by entering into cyclical liabilities on the interbank market before investing in loan portfolios. Therefore, banks are better able to attract funds from uninsured creditors. Our results show that implicit government guarantees incentivize banks to have large interbank exposures, to be highly interconnected, and to invest in highly correlated, risky portfolios. This can serve as an explanation for the observed high interconnectedness between banks and their investment behavior in the run-up to the subprime mortgage crisis.
Author: | Tim Eisert, Christian Eufinger |
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URN: | urn:nbn:de:hebis:30:3-347863 |
URL: | https://www.stern.nyu.edu/sites/default/files/assets/documents/con_035720.pdf |
Document Type: | Report |
Language: | English |
Year of Completion: | 2012 |
Year of first Publication: | 2012 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2014/08/12 |
Tag: | bailout; cycle flows; cyclical liabilities; interbank network; leverage |
Issue: | Version 10 April 2012 |
Page Number: | 38 |
HeBIS-PPN: | 347238297 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |