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Systemic Credit Freezes in Financial Lending Networks

Daron Acemoglu, Asuman Ozdaglar, James Siderius and Alireza Tahbaz-Salehi

No 27149, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a network model of interbank lending, in which banks decide to extend credit to their potential borrowers. Borrowers are subject to shocks that may force them to default on their loans. In contrast to much of the previous literature on financial networks, we focus on how anticipation of future defaults may result in ex ante “credit freezes,” whereby banks refuse to extend credit to one another. We first characterize the terms of the interbank contracts and the patterns of interbank lending that emerge in equilibrium. We then study how shifts in the distribution of shocks can result in complex credit freezes that travel throughout the network. We use this framework to analyze the effects of various policy interventions on systemic credit freezes.

JEL-codes: D85 G01 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ban, nep-net and nep-ore
Note: CF EFG
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Published as Daron Acemoglu & Asuman Ozdaglar & James Siderius & Alireza Tahbaz-Salehi, 2021. "Systemic credit freezes in financial lending networks," Mathematics and Financial Economics, vol 15(1), pages 185-232.

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