Decentralized Clearing in Financial Networks

Péter Csóka and P. Jean-Jacques Herings

No 1603, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents' assets might be insufficient to satisfy their liabilities leading to defaults. We assume the primitives to be denoted in some unit of account. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. We present a convenient representation of bankruptcy rules. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Both clearing payment matrices and the corresponding values of equity are not uniquely determined. We provide bounds on the possible levels equity can take. We analyze decentralized clearing processes and show the convergence of any such process in finitely many steps to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.

Keywords: Networks; Bankruptcy Problems; Systemic Risk; Decentralized Clearing; Indivisibilities. (search for similar items in EconPapers)
JEL-codes: C71 G10 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-01
New Economics Papers: this item is included in nep-gth and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Decentralized Clearing in Financial Networks (2018)
Working Paper: Decentralized Clearing in Financial Networks (2016)
Working Paper: Decentralized clearing in financial networks (2016)
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