Systemic Risk in Financial Networks

29 Pages Posted: 24 Sep 1999

See all articles by Larry Eisenberg

Larry Eisenberg

New Jersey Institute of Technology

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: July 1999

Abstract

We consider default by firms that are part of a single clearing mechanism. The obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity. We first show, via a fixed-point argument, that there always exists a "clearing payment vector" that clears the obligations of the members of the clearing system; under mild regularity conditions, this clearing vector is unique. Next, we develop an algorithm that both clears the financial network in a computationally efficient fashion and provides information on the systemic risk faced by individual system firms. Finally, we produce qualitative comparative statics for financial networks. These comparative statics imply that, in contrast to single-firm results, unsystematic, nondissipative shocks to the system will lower the total value of the network and may lower the value of the equity of some of the individual network firms.

JEL Classification: C63, G21, G33

Suggested Citation

Eisenberg, Laurence K. and Noe, Thomas H., Systemic Risk in Financial Networks (July 1999). Available at SSRN: https://ssrn.com/abstract=173249

Laurence K. Eisenberg

New Jersey Institute of Technology ( email )

School of Management
Newark, NJ 07102-1982
United States
973 642-7263 (Phone)
973 596-3074 (Fax)

HOME PAGE: http://som.njit.edu/people/eisenberg.php

Thomas H. Noe (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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