Propagation of credit freezes in financial lending networks
Name
1126651820-MIT.pdf
Size
11.21 MB
Format
Adobe PDF
Checksum (MD5)
813125f385742db5ccdfc22967235c35
Author(s)
Siderius, James.
Advisor(s)
Asu Ozdaglar.
Date Issued
2018
Publisher
Massachusetts Institute of Technology
Abstract
We consider a network model of financial intermediation where banks (financial intermediaries) lend to and borrow from each other and supply funds to clients. A key decision for a bank is whether to extend credit to other banks, which may then default on those loans. In contrast to much of the previous literature on financial networks, the focus is on how "fear of future default" can lead to "credit freezes" before the realization of these uncertainties. Specifically, we show that increases in the riskiness of one or few banks can lead to systemic credit freeze throughout the financial network. Notably, credit freezes can happen in parts of the network that are not directly affected by increased uncertainty, both because the potential consequences of uncertainty travel throughout the network and also because such changes affect profitability of loans between different parties. We then use this framework to analyze the effects of policy interventions on systemic credit freezes.
Description
Thesis: S.M., Massachusetts Institute of Technology, Department of Electrical Engineering and Computer Science, 2018
Cataloged from PDF version of thesis.
Includes bibliographical references (pages 131-134).
Subjects
Electrical Engineering and Computer Science.
MIT Department
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science
Terms of Use
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