Intermediation and Voluntary Exposure to Counterparty Risk / Maryam Farboodi.

Format:

Book

Author/Creator:

Farboodi, Maryam.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29467.

NBER working paper series no. w29467

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

I study a model of the financial sector in which intermediation among debt financed banks gives rise to an endogenous core-periphery network - few highly interconnected and many sparsely connected banks. Endogenous intermediation generates excessive systemic risk in the financial network. Financial institutions have incentives to capture intermediation spreads through strategic borrowing and lending decisions. By doing so, they tilt the division of surplus along an intermediation chain in their favor, while at the same time reducing aggregate surplus. The network is inefficient relative to a constrained efficient benchmark since banks who make risky investments "overconnect", exposing themselves to excessive counterparty risk, while banks who mainly provide funding end up with too few connections.

Notes:

Print version record

November 2021.