Multiple lending, credit lines, and financial contagion
Giuseppe Cappelletti () and
Paolo Emilio Mistrulli ()
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Giuseppe Cappelletti: European Central Bank
No 1123, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area
Multiple lending has been widely investigated from both an empirical and a theoretical perspective. Nevertheless, the implications of multiple lending for the stability of the banking system still need to be understood. By lending to a common set of borrowers, banks are interconnected and then exposed to financial contagion phenomena, even if not directly. In this paper, we investigate a specific type of externality that originates from those borrowers that obtain liquidity from more than one bank. In this case, contagion may occur if a bank hit by a liquidity shock calls in some loans and borrowers then pay them back by drawing money from other banks. We show that, under certain circumstances that make other sources of liquidity unavailable or too costly, multiple lending might be responsible for a large liquidity shortage.
Keywords: financial contagion; multiple lending; credit lines (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1123_17
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