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Multiple lending, credit lines and financial contagion

Giuseppe Cappelletti and Paolo Emilio Mistrulli

No 2089, Working Paper Series from European Central Bank

Abstract: 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. JEL Classification: G21, G28

Keywords: credit lines; financial contagion; interbank market; multiple lending; systemic risk (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cbe, nep-cfn and nep-mon
Date: 2017-07
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