Chained financial contracts and global banks

This paper studies a chained credit contract based on Hirakata et al. (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 Berna...

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Published in:Economics letters 2015-04, Vol.129, p.87-90
Main Author: Luk, Paul
Format: Article
Language:English
Subjects:
Bank loans
Banks
Capital market
Chained credit contracts
Entrepreneurial finance
Entrepreneurs
Financial accelerators
Financial services
International banking
Risk premiums
Securities markets
Small and medium sized enterprises
Studies
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description This paper studies a chained credit contract based on Hirakata et al. (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. •This paper studies chained credit contracts between households, bank and firms.•Optimal solution has a simple structure resembling the financial accelerator.•An example of chained credit contracts in global banks is discussed.•Global banks causes positive comovements in external finance premia.
doi_str_mv 10.1016/j.econlet.2015.02.004
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source International Bibliography of the Social Sciences (IBSS); ScienceDirect Journals
subjects Bank loans
Banks
Capital market
Chained credit contracts
Entrepreneurial finance
Entrepreneurs
Financial accelerators
Financial services
International banking
Risk premiums
Securities markets
Small and medium sized enterprises
Studies
title Chained financial contracts and global banks
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