FRIC/Finance Seminar with Tim Eisert, Goethe University Frankfurt and New York University
FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Tim Eisert, Goethe University Frankfurt and New York University.
Tim Eisert will present:
Tim Eisert, Goethe University Frankfurt and New York University
Christian Eufinger, Goethe University Frankfurt and University of Pennsylvania
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.