Chained financial contracts and global banks

Sheung Kan LUK*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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
DOIs
Publication statusPublished - 1 Apr 2015

Scopus Subject Areas

  • Finance
  • Economics and Econometrics

User-Defined Keywords

  • Banks
  • Chained credit contracts
  • Financial accelerators

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