Intermediation and Voluntary Exposure to Counterparty Risk

Maryam Farboodi

Journal of Political Economy, 2023, vol. 131, issue 12, 3267 - 3309

Abstract: I study a model of the financial sector in which intermediation among debt-financed banks gives rise to an endogenous core-periphery network. Endogenous intermediation generates excessive systemic risk in the financial network. Financial institutions have incentives to capture intermediation spreads through strategic borrowing and lending decisions. By doing so, they tilt the division of surplus along an intermediation chain in their favor, while at the same time reducing aggregate surplus. The network is inefficient relative to a constrained-efficient benchmark, since banks that make risky investments “overconnect,” exposing themselves to excessive counterparty risk, while banks that mainly provide funding end up with too few connections.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://dx.doi.org/10.1086/725168 (application/pdf)
http://dx.doi.org/10.1086/725168 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/725168

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().