Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/88737
Authors: 
Eisert, Tim
Eufinger, Christian
Year of Publication: 
2013
Series/Report no.: 
SAFE Working Paper Series 10
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.
Subjects: 
bailout
cycle flows
cyclical liabilities
interbank network
leverage
JEL: 
G01
G21
G28
L14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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