Liquidity sharing and financial contagion /

Saved in:
Bibliographic Details
Author / Creator:Nash, John Gerard Francis, author.
Ann Arbor : ProQuest Dissertations & Theses, 2016
Description:1 electronic resource (111 pages)
Format: E-Resource Dissertations
Local Note:School code: 0330
URL for this record:
Hidden Bibliographic Details
Other authors / contributors:University of Chicago. degree granting institution.
Notes:Advisors: Douglas Diamond Committee members: Lin William Cong; Zhiguo He; Stavros Panageas; Amit Seru.
Dissertation Abstracts International, Volume: 77-10(E), Section: A.
Summary:This dissertation studies multi-lateral incentive provision and contagion in the financial system. I develop a model of the financial system with liquidity shocks, moral hazard, and asymmetric information. Banks share liquidity by forming lending relationships with and without commitment. The decision to make lending relationships committed or uncommitted involves a trade-off between liquidity provision and moral hazard. I highlight how uncommitted lending relationships, such as the credit lines between banks in the federal funds market, expose banks to potential liquidity shortages. However, liquidity shortages, which induce early default, can also align banks' screening incentives. If banks collectively use uncommitted lending relationships, incentive alignment can be multi-lateral. Liquidity shortages can exacerbate or ameliorate contagion, depending on information quality. These effects result from informed banks exerting externalities on uninformed banks. The model suggests the "tightness" of connections in the financial system should be an active consideration for policies targeting systemic risk-mitigation.