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SUMMARY:Intermediation and Voluntary Exposure to Counterparty Risk - Farbo
 odi\, M (Princeton University)
DTSTART:20140827T080000Z
DTEND:20140827T083000Z
UID:TALK53891@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:I develop a model of the financial sector in which endogenous 
 intermediation among debt financed banks generates excessive systemic risk
 . Financial institutions have incentives to capture intermediation spreads
  through strategic borrowing and lending decisions. By doing so\, they til
 t the division of surplus along an intermediation chain in their favor\, w
 hile at the same time reducing aggregate surplus.  I show that a core-peri
 phery network -- few highly interconnected and many sparsely connected ban
 ks -- endogenously emerges in my model. The network is inefficient relativ
 e to a constrained efficient benchmark since banks who make risky investme
 nts "overconnect"\, exposing themselves to excessive counterparty risk\, w
 hile banks who mainly provide funding end up with too few connections. The
  predictions of the model are consistent with empirical evidence in the li
 terature.\n
LOCATION:Seminar Room 1\, Newton Institute
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