Financial Networks: Contagion, Commitment, and Private Sector Bailouts

Leitner, Yaron

doi:10.1111/j.1540-6261.2005.00821.x

“…Thereby, different financial securities including sovereign bonds, corporate bonds, as well as asset backed securities, are used to raise liquidity and serve as security in case of default. The main shelter for these belongings is the over-the-counter interbank market, where banks with excess liquidity provide credit to other banks in the need of cash (see Gorton and Metrick (2012b) and Gorton and Metrick (2012a)), which allows them to coinsure against liquidity shocks and prevents solvent banks from illiquidity (as shown in Allen and Gale (2000) and Leitner (2005)). However, since financial assets are usually unproductive, the question comes up why institutions in the need of cash do not just simply sell these assets rather than entering a bilateral secured credit contract.…”

Section: Introductionmentioning

confidence: 99%

Asymmetric Information in Frictional Markets for Liquidity: On the Non-Equivalence of Credit and Sale

Madison

¹

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Work in ProgressAbstract: In the aftermath of the global financial crisis, the market for unsecured credit literally dried out and collateral secured debt became the most widely used concept to coinsure against liquidity shocks. However, since financial assets are usually unproductive, the question comes up why institutions in the need of cash do not just simply sell these assets rather than using them as collateral. The aim of this paper is to develop a non-equivalence between secured credit and outright sale in the presence of asymmetric information and to show through a signaling game, why the willingness to deposit assets as collateral is a best response.JEL Classification: D82, E44, G12, G21

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“…Differently from the seminal work by Allen and Gale (2000) both papers show that, under certain conditions, complete claims structures may be less robust than incomplete ones. In Leitner (2005) the whole network may collapse if liquidity is concentrated in a too small group of banks (see also Babus (2014), in't Veld et al (2014), and Blasques et al (2014)). More recently, Glode and Opp (2014) study intermediation chains as a means to overcome large asymmetric information.…”

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confidence: 99%

A Network View on Interbank Market Freezes

Gabrieli

¹

,

Georg

²

2014

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We study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Eurosystem's payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change in the network structure is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.

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“…A similar conclusion is reached by Freixas et al (2000) and Leitner (2005). Furthermore, Gai and Kapadia (2010) employ tools borrowed from the epidemiological literature to show that greater connectivity reduces the likelihood of widespread default, but also that dense financial networks display the tendency to be "robustyet-fragile": the probability of contagion is typically low, but when it happens its effects will be widespread and difficult to isolate.…”

Section: Introductionmentioning

confidence: 81%

Post-mortem examination of the international financial network

Chinazzi

¹

,

Fagiolo

²

,

Reyes

³

et al. 2013

Journal of Economic Dynamics and Control

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu As the recent crisis has forcefully suggested, understanding financial-market interconnectedness is of a paramount importance to explain systemic risk, stability and economic dynamics. In this paper, we address these issues along two related perspectives. First, we explore the statistical properties of the International Financial Network (IFN), defined as the weighted-directed multigraph where nodes are world countries and links represent debtor-creditor relationships in equities and short/long-run debt. We investigate whether the 2008 financial crisis has resulted in a significant change in the topological properties of the IFN. Our findings suggest that the crisis caused not only a reduction in the amount of securities traded, but also induced changes in the topology of the network and in the time evolution of its statistical properties. This has happened, however, without changing the disassortative, core-periphery structure of the IFN architecture. Second, we perform an econometric study to examine the ability of network-based measures to explain crosscountry differences in crisis intensity. We investigate whether the conclusion of previous studies showing that international connectedness is not a relevant predictor of crisis intensity may be reversed, once one explicitly accounts for the position of each country within the IFN. We show that higher interconnectedness reduces the severity of the crisis, as it allows adverse shocks to dissipate quicker. However, the systemic risk hypothesis cannot be completely dismissed and being central in the network, if the node is not a member of a rich club, puts the country in an adverse and risky position in times of crises. Finally, we find strong evidence of nonlinear effects, once the high degree of heterogeneity that characterizes the IFN is taken into account. Terms of use: Documents in

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Financial Networks: Contagion, Commitment, and Private Sector Bailouts

Cited by 343 publications

References 35 publications

Asymmetric Information in Frictional Markets for Liquidity: On the Non-Equivalence of Credit and Sale

Asymmetric Information in Frictional Markets for Liquidity: On the Non-Equivalence of Credit and Sale

A Network View on Interbank Market Freezes

Post-mortem examination of the international financial network

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