Department of Economics
Chained financial contracts and global banks
© 2015 Elsevier B.V. This paper studies a chained credit contract based on Hirakata etal. (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 comovement of the external finance premia across economies.
Banks, Chained credit contracts, Financial accelerators
Source Publication Title
Luk, Paul. "Chained financial contracts and global banks." Economics Letters 129 (2015): 87-90.