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Financial Networks: Contagion, Commitment, and Private Sector Bailouts
Open accessAbstract
I develop a model of financial networks in which linkages not only spread contagion, but also induce private sector bailouts, where liquid banks bail out illiquid banks because of the threat of contagion. Introducing this bailout possibility, I show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible. However, in some cases (e.g., when liquidity is concentrated among a small group of banks), the whole network may collapse. I also characterize the optimal network size and apply the results to joint liability arrangements and payment systems.
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Cited by
Contagion in financial networks
Gai, P., & Kapadia, S. (2010) · Proceedings of the Royal Society A: Mathematical, Physical and Engineering Sciences · doi:10.1098/rspa.2009.0410 · Cited by 1,163
Allen, F., & Babus, A. (2008) · SSRN Electronic Journal · doi:10.2139/ssrn.1094883 · Cited by 365
Collective Moral Hazard and the Interbank Market
Altinoglu, L., & Stiglitz, J. E. (2023) · American Economic Journal: Macroeconomics · doi:10.1257/mac.20210333 · Cited by 16
Metadata
- Authors
- LEITNER, Y.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2005-11-10
- Volume
- 60
- Issue
- 6
- Pages
- 2925-2953
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2120159435
- Cited by
- 389
- References
- 0
- FWCI
- 9.66
- Type
- journal article
- Language
- en
- Open access
- bronze
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- LEITNER, Y. (2005). Financial Networks: Contagion, Commitment, and Private Sector Bailouts. The Journal of Finance. https://doi.org/10.1111/j.1540-6261.2005.00821.x
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Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
