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Does Interbank Borrowing Reduce Bank Risk?


  • We thank an anonymous referee, Adam Ashcraft, Hendrik Hakenes, Iftekhar Hasan, Deborah Lucas, Erik Theissen, and participants at XII Tor Vergata Conference on Money and Banking (2003), the Far Eastern Meeting of the Econometric Society (2004), and the Verein für Socialpolitik Tagung (2004) for valuable comments on earlier drafts.


In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks that allows us to explore the impact of interbank lending when exposures are long term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks.