Fragility of Secured Credit Chains

Piero Gottardi, Vincent Maurin and Cyril Monnet

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: We present a model of secured credit chains in which assets generated from intermediation activity and pledged as collateral create fragility. A dealer stands between a borrower and a financier. The dealer borrows from the financier to fund her project, subject to a moral hazard problem, In addition, the dealer can intermediate between the financier and the borrower, forming a credit chain. Intermediation profits can thus act as collateral for the loan to fund the dealer s own project. When these profits are risky, however, using them as collateral may undermine the dealer s incentives, generating fragility in the chain. The arrival of news about the value of the revenue of the intermediation activity further increases fragility. This fragility channel generates a premium for safe or opaque collateral. The environment considered in our model applies to various situations, such as trade credit chains, securitization and repo markets

Keywords: Collateral; Secured Lending; Intermediation; Fragility (search for similar items in EconPapers)
JEL-codes: G23 G30 (search for similar items in EconPapers)
Date: 2023-02
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Working Paper: Fragility of Secured Credit Chains (2023)
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