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Systemic risk shifting in financial networks

Author

Listed:
  • Elliott, Matthew
  • Georg, Co-Pierre
  • Hazell, Jonathon
Abstract
Banks face different but potentially correlated risks from outside the financial system. Financial connections can share these risks, but they also create the means by which shocks can be propagated. We examine this tradeoff in the context of a new stylized fact we present: German banks are more likely to have financial connections when they face more similar risks. We develop a model that can rationalize such behavior. We argue that such patterns are socially suboptimal and raise systemic risk, but can be explained by risk shifting. Risk shifting motivates banks to correlate their failures with their counterparties, even though it creates systemic risk.

Suggested Citation

  • Elliott, Matthew & Georg, Co-Pierre & Hazell, Jonathon, 2021. "Systemic risk shifting in financial networks," LSE Research Online Documents on Economics 123924, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123924
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    References listed on IDEAS

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    More about this item

    Keywords

    financial networks; asset correlation; contagion;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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