Multiple Lending, Credit Lines and Financial Contagion

43 Pages Posted: 28 Aug 2017

Date Written: June 16, 2017

Abstract

Multiple lending has been widely investigated from both an empirical and a theoretical perspective. Nevertheless, the implications of multiple lending for the stability of the banking system still need to be understood. By lending to a common set of borrowers, banks are interconnected and then exposed to financial contagion phenomena, even if not directly. In this paper, we investigate a specific type of externality that originates from those borrowers that obtain liquidity from more than one bank. In this case, contagion may occur if a bank hit by a liquidity shock calls in some loans and borrowers then pay them back by drawing money from other banks. We show that, under certain circumstances that make other sources of liquidity unavailable or too costly, multiple lending might be responsible for a large liquidity shortage.

Keywords: financial contagion, multiple lending, credit lines

JEL Classification: G21, G28

Suggested Citation

Cappelletti, Giuseppe and Mistrulli, Paolo Emilio, Multiple Lending, Credit Lines and Financial Contagion (June 16, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1123, Available at SSRN: https://ssrn.com/abstract=3026032 or http://dx.doi.org/10.2139/ssrn.3026032

Giuseppe Cappelletti

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paolo Emilio Mistrulli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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