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Analysis of the 2007-8 credit crisis has concentrated on issues of relaxed lending standards, and the perception of irrational behaviour by speculative investors in real estate and other assets. Asset backed securities have been extensively criticised for creating a moral hazard in loan issuance and an associated increase in default risk, by removing the immediate lender's incentive to ensure that the underlying loan…
Private credit assets under management grew from \$158 billion in 2010 to nearly \$2 trillion globally by mid-2024, fundamentally reshaping corporate credit markets. This paper provides a systematic survey of the academic literature on private credit, organizing theory and evidence around four questions: why the market has grown so rapidly, how direct lender technology differs from bank lending, what risk-adjusted re…
We develop a stochastic macro-financial model in continuous time by integrating two specifications of the Keen economic framework with a financial market driven by a jump-diffusion process. The economic block of the model combines monetary debt-deflation mechanisms with Ponzi-type financial destabilization and is influenced by the financial market through a stochastic interest rate that depends on asset price returns…
Information diffusion within financial markets plays a crucial role in the process of price formation and the propagation of sentiment and risk. We perform a comparative analysis of information transfer between industry sectors of the Chinese and the USA stock markets, using daily sector indices for the period from 2000 to 2017. The information flow from one sector to another is measured by the transfer entropy of th…
Academics and practitioners have studied over the years models for predicting firms bankruptcy, using statistical and machine-learning approaches. An earlier sign that a company has financial difficulties and may eventually bankrupt is going in \emph{default}, which, loosely speaking means that the company has been having difficulties in repaying its loans towards the banking system. Firms default status is not techn…
Financial contagion from liquidity shocks has being recently ascribed as a prominent driver of systemic risk in interbank lending markets. Building on standard compartment models used in epidemics, in this work we develop an EDB (Exposed-Distressed-Bankrupted) model for the dynamics of liquidity shocks reverberation between banks, and validate it on electronic market for interbank deposits data. We show that the inte…
Assessing the stability of economic systems is a fundamental research focus in economics, that has become increasingly interdisciplinary in the currently troubled economic situation. In particular, much attention has been devoted to the interbank lending market as an important diffusion channel for financial distress during the recent crisis. In this work we study the stability of the interbank market to exogenous sh…
Credit and liquidity risks represent main channels of financial contagion for interbank lending markets. On one hand, banks face potential losses whenever their counterparties are under distress and thus unable to fulfill their obligations. On the other hand, solvency constraints may force banks to recover lost fundings by selling their illiquid assets, resulting in effective losses in the presence of fire sales - th…
Threadneedle is a multi-agent simulation framework, based on a full double entry book keeping implementation of the banking system's fundamental transactions. It is designed to serve as an experimental test bed for economic simulations that can explore the banking system's influence on the macro-economy under varying assumptions for its regulatory framework, mix of financial instruments, and activities of borrowers a…
Inspired by the recent debate on the macroeconomic implications of the new bank regulatory standards known as Basel III, we tried to find out in this study that the impact of Basel III liquidity and capital requirements in Bangladesh proposed by Basel Committee on Banking Supervision (BCBS, 2010a). A small set of macro variables, using a sample of 22 private commercial banks operating in Bangladesh for the period of …
Microlending, where a bank lends to a small group of people without credit histories, began with the Grameen Bank in Bangladesh, and is widely seen as the creation of Muhammad Yunus, who received the Nobel Peace Prize in recognition of his largely successful efforts. Since that time the modeling of microlending has received a fair amount of academic attention. One of the issues not yet addressed in full detail, howev…
Interbank lending and borrowing occur when financial institutions seek to settle and refinance their mutual positions over time and circumstances. This interactive process involves money creation at the aggregate level. Coordination mismatch on interbank credit may trigger systemic crises. This happened when, since summer 2007, interbank credit coordination did not longer work smoothly across financial institutions, …
We report a study of a stylized banking cascade model investigating systemic risk caused by counter party failure using liabilities and assets to define banks' balance sheet. In our stylized system, banks can be in two states: normally operating or distressed and the state of a bank changes from normally operating to distressed whenever its liabilities are larger than the banks' assets. The banks are connected throug…
The search for a market design that ensures stable bank funding is at the top of regulators' policy agenda. This paper empirically shows that the central counterparty (CCP)-based euro interbank repo market features this stability. Using a unique and comprehensive data set, we show that the market is resilient during crisis episodes and may even act as a shock absorber, in the sense that repo lending increases with ri…
ABSTRACT This article examines the optimal capital structure of a firm that can choose both the amount and maturity of its debt. Bankruptcy is determined endogenously rather than by the imposition of a positive net worth condition or by a cash flow constraint. The results extend Leland's (1994a) closed‐form results to a much richer class of possible debt structures and permit study of the optimal maturity of debt as …
Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly a…
We present a macroeconomic agent-based model that combines several mechanisms operating at the same timescale, while remaining mathematically tractable. It comprises enterprises and workers who compete in a job market and a commodity goods market. The model is stock-flow consistent; a bank lends money charging interest rates, and keeps track of equities. Important features of the model are heterogeneity of enterprise…
A direct method for calculating default rates by industry and target corporate segments is not possible given the lack of statistical data. The proposed paper considers a model for filtering the dynamics of the probability of default of corporate companies and other borrowers based on indirect data on the dynamics of overdue debt supplied by the Bank of Russia. The model is based on the equation of the balance of tot…
The Loan Officer Survey tracks bank lending standards and loan demand, providing insight into whether credit supply is tightening or easing in the real economy.
TED Spread measures the difference between interbank lending rates and short-term U.S. government bill yields, historically used as a gauge of credit and funding stress.
The Loan Officer Survey tracks bank lending standards and loan demand, providing insight into whether credit supply is tightening or easing in the real economy.
TED Spread measures the difference between interbank lending rates and short-term U.S. government bill yields, historically used as a gauge of credit and funding stress.