Risk Sharing and Interbank Market Fragilities

Abstract

Risk sharing among banks helps them diversify idiosyncratic risks, but their interbank borrowing costs can become more volatile and bring financial fragility. Banks facing liquidity shortages need to pay an extra cost of credit when their lenders have bargaining powers, which depends on the likelihood of fire-sale and the fire-sale price discount. Risk sharing can decrease likelihood of liquidity shortage and lower the borrowing cost. However, the fire-sale discount increases, since joint distress arises and more assets are liquidated simultaneously. Though the interbank borrowing cost decreases with risk sharing, it may become more sensitive to changes in aggregate uncertainty. [ABSTRACT FROM AUTHOR] Copyright of Seoul Journal of Business is the property of Seoul National University, College of Business Administration and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)