skip to content
 

Intermediation and Voluntary Exposure to Counterparty Risk

Presented by: 
M Farboodi Princeton University
Date: 
Wednesday 27th August 2014 - 09:00 to 09:30
Venue: 
INI Seminar Room 1
Abstract: 

I develop a model of the financial sector in which endogenous intermediation among debt financed banks generates excessive systemic risk. 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. I show that a core-periphery network -- few highly interconnected and many sparsely connected banks -- endogenously emerges in my model. 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. The predictions of the model are consistent with empirical evidence in the literature.

The video for this talk should appear here if JavaScript is enabled.
If it doesn't, something may have gone wrong with our embedded player.
We'll get it fixed as soon as possible.
Presentation Material: 
University of Cambridge Research Councils UK
    Clay Mathematics Institute The Leverhulme Trust London Mathematical Society Microsoft Research NM Rothschild and Sons