Chained Financial Contracts and Global Banks
10 Pages Posted: 13 Nov 2015
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
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