Systemic Risk-Shifting in Financial Networks

Matthew Elliott, Co-Pierre Georg and Jonathon Hazell

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Banks face different but potentially correlated risks from outside the financial system. Financial connections can share these risks, but also create the means by which shocks can propagate. We examine this tradeoff in the context of a new stylised fact we present: German banks are more likely to have financial connections when they face more similar risks—potentially undermining the risk sharing role of financial connections and contributing to systemic risk. We find that such patterns are socially suboptimal, but can be explained by risk-shifting. Risk-shifting motivates banks to correlate their failures with their counterparties, even though it creates systemic risk.

Keywords: financial networks; asset correlation; contagion (search for similar items in EconPapers)
JEL-codes: D85 G11 G21 (search for similar items in EconPapers)
Date: 2020-07-20
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-net, nep-ore and nep-rmg
Note: mle30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2068

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