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Collective moral hazard and the interbank market (Altinoglu & Stiglitz)

Collective moral hazard and the interbank market by Levent Altinoglu, Joseph Stiglitz published by VOXEU (4/2022).

The interconnected structure of the financial system has been a focal point of debate among policymakers in the wake of recent financial crises. This column offers a theory to help explain the structure of the financial system and its consequences for risk-taking and systemic risk. The authors find that interconnectedness and excessive risk-taking reinforce one another and the anticipation of ex-post government intervention may exacerbate the systemic risk. The theory, in turn, has important implications for the design of macroprudential regulation. 

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