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SUMMARY:Why are Banks Highly Interconnected? - Lehar\, A (University of Ca
 lgary)
DTSTART:20140826T080000Z
DTEND:20140826T083000Z
UID:TALK53874@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Joint with A. David\n\nWe study optimal interconnections betwe
 en banks in alternative banking systems created using interbank loans and 
 over-the-counter derivatives. Settlements on all interbank payments are re
 negotiated in the event of financial distress of a counterparty. A high de
 gree of interconnectectness plays a positive role as it commits counterpar
 ties to renegotiate claims to reduce dead weight liquidation costs in the 
 system. We show that the renegotiable interbank loans form the optimal int
 erconnection to the joint risk management and asset quality problem faced 
 by the banks. In addition\, our analysis shows that systemic spillovers an
 d the likelihood of financial crises are severely mismeasured when interba
 nk renegotiations are not considered. The optimality of interbank loans is
  shown to hold in a wide range of institutional settings.\n
LOCATION:Seminar Room 1\, Newton Institute
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