Collective Moral Hazard and the Interbank Market
Abstract
The concentration of risk within the financial system leads to systemic instability. We propose a theory to explain the structure of the financial system and show how it alters the risk-taking incentives of financial institutions when the government optimally intervenes during crises. By issuing interbank claims, risky institutions endogenously become large and interconnected. This concentrated structure enables institutions to share the risk of systemic crises in a privately optimal way but leads to excessive risk taking even by peripheral institutions. Interconnectedness and excessive risk taking reinforce one another. Macroprudential regulation that limits the interconnectedness of risky institutions improves welfare. (JEL D82, E44, G01, G21, G28)
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The 2008 crisis is a key case to study how political economy structures can impact financial instability and recovery patterns.
“The 2008 crisis, thus, is a key case to study how the political economy structures can impact financial instability and recovery patterns (Altinoglu & Stiglitz, 2023).”
From The Interactions Between Political Economy and Global Financial Crises: A Case Study of the 2008 Global Recession (2026) · cites this paper as Altinoglu & Stiglitz, 2023
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Hochmair, H. H., Wang, X., & Hamid, M. B. A. (2026) · International Academic Journal of Economics · doi:10.71086/iaje/v13i1/iaje1305
- Authors
- Altinoglu, L., & Stiglitz, J. E.
- Affiliations
- Federal Reserve Board of Governors (US)
- Columbia University (US)
- ORCID
- Stiglitz, Joseph E.
- Venue
- American Economic Journal: Macroeconomics
- Publisher
- American Economic Association
- Published
- 2023-04-01
- Volume
- 15
- Issue
- 2
- Pages
- 35-64
- ISSN
- 1945-7707 (ISSN-L)
- 1945-7715
- OpenAlex
- W4362471392
- Cited by
- 16
- References
- 0
- Citations by year
- 2026: 2 · 2025: 2 · 2024: 6 · 2022: 1 · 2021: 1 · 2020: 2 · 2019: 1 · 2017: 1
- FWCI
- 2.11
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- American Economic Journal Macroeconomics (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Banking stability, regulation, efficiency
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Social Sciences › Economics, Econometrics and Finance › Finance › Global Financial Regulation and Crises
- Keywords
- interbank market, systemic risk, financial interconnectedness, excessive risk-taking, macroprudential regulation, financial system structure
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