A lending scheme for a system of interconnected banks with probabilistic constraints of failure

Francesco Cordoni, Luca Di Persio and Luca Prezioso

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Abstract: We derive a closed form solution for an optimal control problem related to an interbank lending schemes subject to terminal probability constraints on the failure of banks which are interconnected through a financial network. The derived solution applies to a real banks network by obtaining a general solution when the aforementioned probability constraints are assumed for all the banks. We also present a direct method to compute the systemic relevance parameter for each bank within the network.

Date: 2019-03, Revised 2019-10
New Economics Papers: this item is included in nep-ban
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