Does interbank borrowing reduce bank risk?

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. JEL codes: E53, G21 Keywords: interbank market, bank risk, market discipline, transition countries.
POL1CYMAKERS HAVE SHOWN considerable interest in market discipline as a supplement to bank regulation. The idea is that regulators can use market signals to identify banks that the market perceives [...]