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Indiana University Bloomington

BEPP

The Kelley Advantage

The department is home to the authors of Managerial Economics and Business Strategy and Games and Information: An Introduction to Game Theory, two of the nation’s leading textbooks in the field.

Research and Publications

Journal Articles

Does Interbank Borrowing Reduce Risk?

2009, Journal of Money, Credit, and Banking

Valeriya Dinger, Jürgen von Hagen

Abstract

In this paper we investigate whether interbank exposures create incentives for interbank monitoring as “signalled” by reduced level of risk undertaking of the interbank borrowing banks. We present a model of the credit market based on asymmetric information and moral hazard. Assuming that banks have monitoring costs benefits compared to depositors regarding the lending activities of the other banks, we show that interbank lending induces the borrowing banks to engage in less risky lending activities than banks that finance themselves predominantly in the deposit market. We empirically test the implications of the model on a large sample of banks from 10 Central and Eastern European
countries. The results of the empirical analysis generally confirm the implications of the model.

Citation

von Hagen, Jürgen and Valeriya Dinger (2009), “Does Interbank Borrowing Reduce Risk?,” Journal of Money, Credit, and Banking, Vol. 41, No. 2-3, March-April, pp. 491-506.

Keywords

interbank market, bank risk, market discipline, transition countries