Chained financial contracts and global banks

Paul Luk ()

Economics Letters, 2015, vol. 129, issue C, 87-90

Abstract: This paper studies a chained credit contract based on Hirakata et al. (2013) in which investors lend funds to banks and banks lend to entrepreneurs in an imperfect financial market. We show that the optimality condition of this contract has a simple, symmetric structure analogous to the one in Bernanke, Gertler and Gilchrist (1999), and that the external finance premium is increasing in both the entrepreneurs’ and the bank’s capital to net worth ratio. We apply the chained credit contract to analyse global banks, and show that the common lender effect drives the positive comovement of the external finance premia across economies.

Keywords: Financial accelerators; Banks; Chained credit contracts (search for similar items in EconPapers)
JEL-codes: E44 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:129:y:2015:i:c:p:87-90

DOI: 10.1016/j.econlet.2015.02.004

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