Financial connections and systemic risk
By: Franklin Allen, Ana Babus, Elena Carletti
Contributors: Babus, Ana; Carletti, Elena; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16177; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16177.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We develop a model where institutions form connections through swaps of projects in order to diversify their individual risk.  These connections lead to two different network structures.  In a clustered network groups of financial institutions hold identical portfolios and default together.  In an unclustered network defaults are more dispersed.  With long term finance welfare is the same in both networks.  In contrast, when short term finance is used, the network structure matters.  Upon the arrival of a signal about banks' future defaults, investors update their expectations of bank solvency.  If their expectations are low, they do not roll over the debt and there is systemic risk in that all institutions are early liquidated.  We compare investors' rollover decisions and welfare in the two networks"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/19/2010.

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