Decentralized Clearing in Financial Networks

Csóka, Péter and Herings, Jean-Jacques P. (2016) Decentralized Clearing in Financial Networks. Working Paper. Corvinus University of Budapest Faculty of Economics, Budapest.

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We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents' assets might be insufficient to satisfy their liabilities leading to defaults. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Since clearing payment matrices and the corresponding values of equity are not uniquely determined, we provide bounds on the possible levels equity can take. Unlike the existing literature, which studies centralized clearing procedures, we introduce a large class of decentralized clearing processes. We show the convergence of any such process in finitely many iterations to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2016/14
Uncontrolled Keywords:networks, bankruptcy problems, systemic risk, decentralized clearing, indivisibilities
JEL classification:C71 - Cooperative Games
G10 - General Financial Markets: General (includes Measurement and Data)
Subjects:Mathematics, Econometrics
Projects:NKFIH PD 105859, COST Action IC1205
ID Code:2508
Deposited By: Ádám Hoffmann
Deposited On:16 Nov 2016 08:13
Last Modified:16 Nov 2016 08:13

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