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

Tim Eisert and Christian Eufinger ()

No 10, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper presents a new theory that explains why it is beneficial for banks to be highly interconnected and to engage in herding behavior. It shows that these two important causes of systemic risk are interdependent and thus cannot be considered in isolation. The reason is that banks have an incentive to exploit their implicit government guarantees by artificially channeling funds through the interbank market, which leads to high interconnectedness. Moreover, given that banks are highly interconnected, they are incentivized to invest in correlated portfolios to minimize contagion risks and thereby maximize the government subsidy per invested unit of capital.

Keywords: bailout; systemic risk; interconnectedness; herding; interbank network (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2014, Revised 2014
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:10

DOI: 10.2139/ssrn.2231984

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