Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/203266
Authors: 
Eisert, Tim
Eufinger, Christian
Year of Publication: 
2014
Series/Report no.: 
SAFE Working Paper No. 10
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.
Subjects: 
bailout
systemic risk
interconnectedness
herding
interbank network
JEL: 
G01
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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