Chained Financial Contracts and Global Banks

10 Pages Posted: 13 Nov 2015

See all articles by Paul Luk

Paul Luk

Hong Kong Institute for Monetary and Financial Research

Date Written: 2015

Abstract

This paper studies a chained credit contract based on Hirakata, Sudo and Ueda (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 comovment of the external finance premia across economies.

Keywords: Financial accelerators, banks, chained credit contracts.

JEL Classification: E44

Suggested Citation

Luk, Paul, Chained Financial Contracts and Global Banks (2015). Economics Letters, Vol. 129, 2015, Available at SSRN: https://ssrn.com/abstract=2690097

Paul Luk (Contact Author)

Hong Kong Institute for Monetary and Financial Research ( email )

Hong Kong

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