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Resolution rules in a system of financially linked firms

Author

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  • Gabrielle Demange

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

The reimbursement abilities of firms holding liabilities on each other are intertwined, potentially generating coordination failures and defaults through uncontrolled contagion. In stress episodes, these linkages thus call for an orderly resolution, as implemented by a regulatory authority assigning the amount each firm within the system reimburses to each other one. The paper studies such resolution by considering 'rules', assuming their primary goal is to avoid default on external debts, say, banks' defaults on deposits. The main objective is to investigate what proportionality means for a rule, taking into account various legal and informational constraints.

Suggested Citation

  • Gabrielle Demange, 2020. "Resolution rules in a system of financially linked firms," Working Papers hal-02502413, HAL.
    • Handle: RePEc:hal:wpaper:hal-02502413
    Note: View the original document on HAL open archive server: https://hal.science/hal-02502413v1
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    File URL: https://hal.science/hal-02502413v1/document
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    References listed on IDEAS

    as
    1. Péter Csóka & P. Jean-Jacques Herings, 2021. "An Axiomatization of the Proportional Rule in Financial Networks," Management Science, INFORMS, vol. 67(5), pages 2799-2812, May.
    2. Frankel, David M. & Volij, Oscar, 2011. "Measuring school segregation," Journal of Economic Theory, Elsevier, vol. 146(1), pages 1-38, January.
    3. Michel L. Balinski & Gabrielle Demange, 1989. "Algorithm for Proportional Matrices in Reals and Integers," Post-Print halshs-00585327, HAL.
    4. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
    5. Moulin, Hervé, 2016. "Entropy, desegregation, and proportional rationing," Journal of Economic Theory, Elsevier, vol. 162(C), pages 1-20.
    6. Gabrielle Demange & Michel L. Balinski, 1989. "An Axiomatic Approach to Proportionality between Matrices," Post-Print halshs-00670952, HAL.
    7. Mirjam Groote Schaarsberg & Hans Reijnierse & Peter Borm, 2018. "On solving mutual liability problems," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 87(3), pages 383-409, June.
    8. Thomson, William, 2003. "Axiomatic and game-theoretic analysis of bankruptcy and taxation problems: a survey," Mathematical Social Sciences, Elsevier, vol. 45(3), pages 249-297, July.
    9. Stutzer, Michael, 2018. "The bankruptcy problem in financial networks," Economics Letters, Elsevier, vol. 170(C), pages 31-34.
    10. M. L. Balinski & G. Demange, 1989. "An Axiomatic Approach to Proportionality Between Matrices," Mathematics of Operations Research, INFORMS, vol. 14(4), pages 700-719, November.
    11. Aumann, Robert J. & Maschler, Michael, 1985. "Game theoretic analysis of a bankruptcy problem from the Talmud," Journal of Economic Theory, Elsevier, vol. 36(2), pages 195-213, August.
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    Cited by:

    1. Gabrielle Demange, 2021. "On the resolution of cross-liabilities," Working Papers halshs-03151128, HAL.

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    More about this item

    Keywords

    bankruptcy; entropy; cross-liabilities; defaults; central counter-party;
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