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Liquidity in Credit Networks: A Little Trust Goes a Long Way [article]

Pranav Dandekar, Ashish Goel, Ramesh Govindan, Ian Post
2012 arXiv   pre-print
Credit networks represent a way of modeling trust between entities in a network. Nodes in the network print their own currency and trust each other for a certain amount of each other's currency.  ...  A natural question to ask in this setting is: how long can the network sustain liquidity, i.e., how long can the network support the routing of payments before credit dries up?  ...  Acknowledgements This research was supported in part by NSF award IIS-0904325.  ... 
arXiv:1007.0515v3 fatcat:blpobzdconh4leirbg6f3v2vkq

Leveraged Liquidity: Bear Raids and Junk Loans in the New Credit Market

José M. Gabilondo
2008 Social Science Research Network  
LEVERAGE AND LIQUIDITY Loops IN THE FINANCIAL SECTOR Soon before the 2007 summer credit crunch, a Fed official noted that "there is little reason to believe we have entered a new era of permanent stability  ...  First, a firm can convert the liquidity of its assets into the firm's own liquidity, so long as a secondary market cooperates.  ...  Elsewhere in their paper, Modigliani and Miller note that, in fact, a range of interest rates exist.  ... 
doi:10.2139/ssrn.1137168 fatcat:tqdbjjw6afe55aeqvovrki7vme

Liquidity-Saving through Obligation-Clearing and Mutual Credit: An Effective Monetary Innovation for SMEs in Times of Crisis

Tomaž Fleischman, Paolo Dini, Giuseppe Littera
2020 Journal of Risk and Financial Management  
The paper also demonstrates that when used in conjunction with a complementary currency system such as mutual credit as a liquidity source the effectiveness of obligation-clearing can be doubled.  ...  This paper shows that obligation-clearing is a very effective liquidity-saving method for providing relief in the trade credit market and, therefore, on the supply-side or productive part of the economy  ...  Paolo Dini worked as a part-time R&D consultant for Sardex S.p. A. 2016-2019.  ... 
doi:10.3390/jrfm13120295 fatcat:ppsd6c55yrdftlvwlodgkwa6k4

Inter-bank Market and Liquidity Distribution during the Great Financial Crisis: The e-MID Case [chapter]

Gianfranco A. Vento, Pasquale La Ganga
2010 New Issues in Financial and Credit Markets  
The aim of the research is to investigate how the operative solutions recently adopted by the e-MID may represent a viable answer in order to improve the liquidity distribution.  ...  out if the introduction of an anonymous and collateralized segment in the e-MID market since February 2009 may improve the liquidity distribution within the euro area.  ...  In this way, also less liquid assets, or securities which are not eligible as collateral for Eurosystem's monetary policy operations can contribute to create liquidity.  ... 
doi:10.1057/9780230302181_7 fatcat:z7vqvjxaqramlkdus2ozcn26ru

Shadow Bank Monitoring

Tobias Adrian, Adam B. Ashcraft, Nicola Cetorelli
2013 Social Science Research Network  
The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops.  ...  The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile.  ...  However, it did not take long for the banking system to find ways to continue to originate credit off balance sheet.  ... 
doi:10.2139/ssrn.2334918 fatcat:53up26lzdneejl66c33iq32a5e

The Role of Trust in Maintaining the Resilience of Financial Markets

Roman A. Tomasic, Folarin Akinbami
2013 Social Science Research Network  
After looking at the GFC the section goes on to highlight three examples of breakdowns of trust in the run-up to the GFC.  ...  to the US House of Representatives Committee on Financial Services, April 20 2010, 5, 9 87 Alt-A loans are loans to borrowers with decent credit scores and credit histories but little or no documentary  ... 
doi:10.2139/ssrn.2266372 fatcat:x4ff36j3jnfhdanpp6kk3t44pm

Payment Systems, Consumer Tragedy, and Ineffective Remedies

Marc Lane Roark
2013 Social Science Research Network  
In many ways mirroring what banks have done with letters of credit, PayPal offered recourse to unsatisfied consumers. 190 This solution is not unusual, as we have long noticed that concepts like liquidity  ...  The network, though not perfectly liquid, achieves near liquidity by its popularity. 8 And like the effect that negotiability had in inuring confidence in closed networks, so too closed networks operate  ...  While insuring against risk sounds attractive at the outset, in many ways it feeds into other problems inherent in the transaction. B.  ... 
doi:10.2139/ssrn.2211013 fatcat:67yvexxxvnc43aevu6sty5t42e

The Subprime Credit Crisis of 07

Stuart M. Turnbull, Michel Crouhy, Robert A. Jarrow
2008 Social Science Research Network  
The ability to independently validate a rating would go a long way toward reducing the effects of conflicts of interest. Independent validation requires that data be available.  ...  In the case of a counterparty posting collateral, regulators need to consider the effects of wrong-way counterparty credit exposure in determining capital requirements.  ...  Given that auditors have generally even less expertise than credit rating agencies at making such estimates and rating agencies have done a poor job in the current crisis, investors will be forced to rely  ... 
doi:10.2139/ssrn.1112467 fatcat:5nucdnuqendg5at64ilgne4vdi

Shadow Banking: Policy Challenges for Central Banks

Thorvald Grung Moe
2014 Social Science Research Network  
We need to reflect and consider whether official sector liquidity should be mobilized to stem a future breakdown in private shadow banking markets.  ...  Abstract Central banks responded with exceptional liquidity support during the financial crisis to prevent a systemic meltdown.  ...  A strict collateral policy would in this way help in preserving the integrity of the fiat money system.  ... 
doi:10.2139/ssrn.2439886 fatcat:hwp6pvpskzco7lplihl2y4ubz4

Borrowing Alone: The Theory and Policy Implications of the Commodification of Finance

Greg Hannsgen
2004 Social Science Research Network  
Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten  ...  They feel obligated to behave in certain ways because of a long history of exchanges, both metaphorical and literal. What is the role of all these social influences on access to credit?  ...  self-select in a favorable way" (263).  ... 
doi:10.2139/ssrn.501383 fatcat:2x7dajfkbnd5xo2jtfvaggvqxa

Bank Monitoring Incentives and Optimal Abs

Henri F. Pagès
2012 Social Science Research Network  
I show that the optimal contract can be implemented with a whole loan sale involving both credit risk retention based on ABS credit default swaps and credit enhancement in the form of a reserve account  ...  I argue that further efficiency gains could be reaped by extending the role of the "premium capture" account into a liquidity buffer capturing performance-based compensation as a way of increasing skin  ...  Finally, the unhedged part of the risk exposure is actually borne by the trust due to the sponsor's limited liability in the event of a liquidation.  ... 
doi:10.2139/ssrn.2057521 fatcat:dv3lu7g3ijhnnmgt55sv37jgmy

Designing Successful Distribution Strategies for Digital Money

Ignacio Mas, Mike McCaffrey
2015 Social Science Research Network  
Also, the speed of adoption of shared networks by banks is likely to be subject to strong network effects: as long as few outlets are shared, banks have little incentive to "give up" their proprietary  ...  There was a huge debate at the time as to the risks that would be brought on to the network if that little bit of the network was "exposed."  ...  CGAP materials are frequently cited in other works. The following is a suggested citation for this Focus Note: Mas, Ignacio. 2008 . "Being Able to Make (Small) Deposits and Payments, Anywhere."  ... 
doi:10.2139/ssrn.1655255 fatcat:nktfq3ampzal3evezu3xps2zdy

Why Bail-In Securities are Fool's Gold

Avinash Persaud
2014 Social Science Research Network  
the spread of risk-in the way that a bank or a credit hedge fund can do far more easily than a traditional pension fund.  ...  From a private investment perspective, bail-in securities are best held by investors able to diversify and monitor a wide range of liquid credit risks, such as hedge funds.  ...  This publication has been subjected to a prepublication peer review intended to ensure analytical quality.  ... 
doi:10.2139/ssrn.2643702 fatcat:idrsrtkv5fdfnpnalzxpyeizbe

Systemic Risk, Contagion, and Financial Networks: A Survey

Matteo Chinazzi, Giorgio Fagiolo
2013 Social Science Research Network  
We end with a discussion of the most important challenges faced by theoretical network-based models of systemic risk.  ...  These include a better understanding of the causal links between network structure and the likelihood of systemic risk and increasingly using the empirical knowledge about real-world financial-network  ...  The banking network is analyzed as a flow network, where credit lines are seen as a way to let the liquidity flow from the node with a liquidity surplus to the one that has a shortage.  ... 
doi:10.2139/ssrn.2243504 fatcat:5ncipum5ivf5nidbd2oomu3gpm

Toward a Run-Free Financial System

John H. Cochrane
2014 Social Science Research Network  
Most deeply, "liquidity" no longer requires that people hold a large inventory of fixed-value, pay-on-demand, and hence run-prone securities.  ...  The "Chicago Plan," discarded in the 1930s, is only one of many such milestones 3 Here a second theme emerges: Modern financial, computational, and communication technology allows us to overcome the long-standing  ...  That credit exposure, which did not trigger a capital charge, again makes the structure a simple way to avoid capital regulation.  ... 
doi:10.2139/ssrn.2425883 fatcat:mobyszwtdfcgnlas4opyiagkxy
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