Systemic credit freezes in financial lending networks
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11579_2020_272_ReferencePDF.pdf
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Author(s)
Acemoglu, K. Daron
Ozdaglar, Asuman
Siderius, James
Tahbaz-Salehi, Alireza
Date Issued
July 1, 2020
Publisher
Springer Berlin Heidelberg
Version
Author's final manuscript
Abstract
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.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Sloan School of Management
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science
Massachusetts Institute of Technology. Laboratory for Information and Decision Systems
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1007/s11579-020-00272-z
