Research and Publications
Does Interbank Borrowing Reduce Risk?
2009, Journal of Money, Credit, and Banking
Valeriya Dinger, Jürgen von Hagen
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.
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.
interbank market, bank risk, market discipline, transition countries