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SUMMARY:Firebreaks and Risk-Shifting in Financial Networks - Matthew Ellio
 tt\, University Lecturer\, Faculty of Economics\, University of Cambridge.
DTSTART:20171026T120000Z
DTEND:20171026T130000Z
UID:TALK72958@talks.cam.ac.uk
CONTACT:CERF/CF Admin
DESCRIPTION:Financial connections hedge risks\, but also propagate large s
 hocks. We characterise socially optimal\nfinancial networks in the presenc
 e of this tradeoff. These networks divide banks into groups\,\nwith strong
  connections within groups but weak connections between groups. The weak c
 onnections\ncreate firebreaks\, which limit the spread of contagion. When 
 financial distress costs are below\na certain threshold\, socially efficie
 nt networks cannot form in equilibrium. Shareholders engage\nin risk-shift
 ing by altering financial connections—thereby increasing equity value\, 
 but also raising\nthe likelihood of contagion. Equally\, socially efficien
 t networks are an equilibrium when financial\ndistress costs are above thi
 s threshold. Contagion becomes so costly that banks are not willing to\nta
 ke the other side of a risk-shifting trade.
LOCATION:Room W4.03 Judge Business School
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