Chained financial contracts and global banks

Paul Luk*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

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    Abstract

    This paper studies a chained credit contract based on Hirakata etal. (2013) in which investors lend funds to banks and banks lend to entrepreneurs in an imperfect financial market. We show that the optimality condition of this contract has a simple, symmetric structure analogous to the one in Bernanke, Gertler and Gilchrist (1999), and that the external finance premium is increasing in both the entrepreneurs' and the bank's capital to net worth ratio. We apply the chained credit contract to analyse global banks, and show that the common lender effect drives the positive comovement of the external finance premia across economies.

    Original languageEnglish
    Pages (from-to)87-90
    Number of pages4
    JournalEconomics Letters
    Volume129
    Early online date10 Feb 2015
    DOIs
    Publication statusPublished - Apr 2015

    Scopus Subject Areas

    • Finance
    • Economics and Econometrics

    User-Defined Keywords

    • Financial accelerators
    • Banks
    • Chained credit contracts

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