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Interbank network and bank bailouts: Insurance mechanism for non-insured creditors?

Tim Eisert and Christian Eufinger ()

No 10, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt

Abstract: This paper presents a theory that explains why it is beneficial for banks to be highly interconnected 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.

Keywords: bailout; cycle flows; cyclical liabilities; interbank network; leverage (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-ias
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

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