Veranstaltung
16
Dec 2019

14:15 - 15:45
IWH Research Seminar

Netting

We present a model to explain why banks maintain off-setting long-term debts without netting them out.

Who
Giorgia Piacentino  (Columbia University)
Where
IWH conference room
Giorgia Piacentino

Personal details

Giorgia Piacentino is Associate Professor of Business, Columbia Business School.

We present a model to explain why banks maintain off-setting long-term debts without netting them out. We show that these non-contingent debts implement contingent transfers, since they embed the option to dilute with new debt to a third party. Even though a diluted bank is worse off ex post, a network of gross debts is stable ex ante, since each bank exercises its option to dilute when it is most valuable. However, the network harbors systemic risk: since one bank’s liabilities are other banks’ assets, a liquidity shock can transmit through the network in a default cascade.

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