Full Payment Algorithm

Abstract

Clearing payments between firms are usually computed under the assumption that firms that cannot fully meet their obligations exhaust their cash resources to make partial payments. In practice, however, firms might wait and see whether they receive payments that would help them to meet their obligations in full before making any payments themselves, thereby avoiding partial payments. In this paper, we model this situation by introducing the Full Payment Algorithm (FPA). We fully characterize the steady state of the FPA, and we prove necessary and sufficient conditions under which it is equivalent to the widely used Eisenberg and Noe model.

Keywords: Financial Networks, Systemic Risk, Clearing Algorithm

JEL Classification: C60, G29