Systemic credit freezes in financial lending networks

Daron Acemoglu, Asuman Ozdaglar, James Siderius*, Alireza Tahbaz-Salehi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

This paper develops a network model of interbank lending, in which banks decide to extend credit to their potential borrowers. Borrowers are subject to shocks that may force them to default on their loans. In contrast to much of the previous literature on financial networks, we focus on how anticipation of future defaults may result in ex ante “credit freezes,” whereby banks refuse to extend credit to one another. We first characterize the terms of the interbank contracts and the patterns of interbank lending that emerge in equilibrium. We then study how shifts in the distribution of shocks can result in complex credit freezes that travel throughout the network. We use this framework to analyze the effects of various policy interventions on systemic credit freezes.

Original languageEnglish (US)
Pages (from-to)185-232
Number of pages48
JournalMathematics and Financial Economics
Volume15
Issue number1
DOIs
StatePublished - Jan 2021

Keywords

  • Contagion
  • Counterparty risk
  • Credit freezes
  • Endogenous financial networks
  • Systemic risk

ASJC Scopus subject areas

  • Statistics and Probability
  • Finance
  • Statistics, Probability and Uncertainty

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