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Systemic credit freezes in financial lending networks

Author(s)
Acemoglu, Daron; Ozdaglar, Asuman; Siderius, James; Tahbaz-Salehi, Alireza
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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.
Date issued
2020-07-01
URI
https://hdl.handle.net/1721.1/131991
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
Publisher
Springer Berlin Heidelberg

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