Interbank network and bank bailouts: Insurance mechanism for non-insured creditors? : [Version 20 Februar 2013]
- 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 |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-293802 |
| URL: | http://ssrn.com/abstract=2231984 |
| DOI: | https://doi.org/10.2139/ssrn.2231984 |
| Parent Title (German): | SAFE working paper series ; No. 10 |
| Series (Serial Number): | SAFE working paper (10) |
| Publisher: | Goethe-Univ., House of Finance, Sustainable Architecture for Finance in Europe, SAFE |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2013 |
| Year of first Publication: | 2013 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2013/04/18 |
| Tag: | bailout; cycle flows; cyclical liabilities; interbank network; leverage |
| Issue: | Version 20 Februar 2013 |
| Page Number: | 46 |
| HeBIS-PPN: | 337758638 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
