arXiv · arXiv · 2023
In this article, we consider the problem of a bank's loan portfolio in the context of liquidity risk, while allowing for the limited liability protection enjoyed by the bank. Accordingly, we construct a novel loan portfolio model with limited liability, while maintaining a threshold level of haircut in the portfolio. For the constructed three-time step loan portfolio, at the initial time, the bank raises capital via …
Deb Narayan Barik, Siddhartha P. Chakrabarty
arXiv · arXiv · 2022
Lending Protocols (LPs), as blockchain-based lending systems, allow any agents to borrow and lend cryptocurrencies. However, liquidity risks could occur, especially when salient loans are initiated by a particular group of borrowers. This paper proposes measurements of liquidity risks, focusing on both available liquidity and market concentration in LPs. By using Aave as a case study, we find that liquidity risks are…
Xiaotong Sun, Charalampos Stasinakis, Georgios Sermpinis
arXiv · arXiv · 2016
We study insolvency cascades in an interbank system when banks are allowed to insure their loans with credit default swaps (CDS) sold by other banks. We show that, by properly shifting financial exposures from one institution to another, a CDS market can be designed to rewire the network of interbank exposures in a way that makes it more resilient to insolvency cascades. A regulator can use information about the topo…
Matt V. Leduc, Sebastian Poledna, Stefan Thurner
arXiv · arXiv · 2026
This text grew out of a historical introduction initially written for a study of interest rates in cryptocurrency markets. The difficulty of defining a term structure for a currency without a conventional bond market led naturally to a more fundamental question: under what historical conditions does a yield curve become observable at all? Credit existed long before modern money, and interest-bearing loans are documen…
Olivier Guéant
arXiv · arXiv · 2025
This paper maps the emerging market for decentralized credit in which ERC 4626 vaults and third-party curators, rather than monolithic lending protocols alone, increasingly determine underwriting and leverage decisions. We show that modular vaults differ in capital utilization, cross-chain and cross asset concentration, and liquidity risk structure. Further, we show that a small set of curators intermediates a dispro…
Anastasiia Zbandut, Carolina Goldstein
arXiv · arXiv · 2025
Small and Medium-sized Enterprises (SMEs) are known to play a vital role in economic growth, employment, and innovation. However, they tend to face significant challenges in accessing credit due to limited financial histories, collateral constraints, and exposure to macroeconomic shocks. These challenges make an accurate credit risk assessment by lenders crucial, particularly since SMEs frequently operate within inte…
Sahab Zandi, Kamesh Korangi, Juan C. Moreno-Paredes, María Óskarsdóttir, Christophe Mues
arXiv · arXiv · 2025
We propose a credit risk model for portfolios composed of green and brown loans, extending the ASRF framework via a two-factor copula structure. Systematic risk is modeled using potentially skewed distributions, allowing for asymmetric creditworthiness effects, while idiosyncratic risk remains Gaussian. Under a non-uniform exposure setting, we establish convergence in quadratic mean of the portfolio loss to a limit r…
Alessandro Ramponi, Sergio Scarlatti
arXiv · arXiv · 2024
This study presents a Reinforcement Learning (RL)-based portfolio management model tailored for high-risk environments, addressing the limitations of traditional RL models and exploiting market opportunities through two-sided transactions and lending. Our approach integrates a new environmental formulation with a Profit and Loss (PnL)-based reward function, enhancing the RL agent's ability in downside risk management…
Ali Habibnia, Mahdi Soltanzadeh
arXiv · arXiv · 2022
Loan seasoning and inefficient consumer interest rate refinance behavior are well-known for mortgages. Consumer automobile loans, which are collateralized loans on a rapidly depreciating asset, have attracted less attention, however. We derive a novel large-sample statistical hypothesis test suitable for loans sampled from asset-backed securities to populate a transition matrix between risk bands. We find all current…
Jackson P. Lautier, Vladimir Pozdnyakov, Jun Yan
arXiv · arXiv · 2020
Quantum models based on the mathematics of quantum mechanics (QM) have been developed in cognitive sciences, game theory and econophysics. In this work a generalization of credit loans is introduced by using the vector space formalism of QM. Operators for the debt, amortization, interest and periodic installments are defined and its mean values in an arbitrary orthonormal basis of the vectorial space give the corresp…
Juan Sebastian Ardenghi
arXiv · arXiv · 2020
Recently, a number of structured funds have emerged as public-private partnerships with the intent of promoting investment in renewable energy in emerging markets. These funds seek to attract institutional investors by tranching the asset pool and issuing senior notes with a high credit quality. Financing of renewable energy (RE) projects is achieved via two channels: small RE projects are financed indirectly through…
N. Packham
arXiv · arXiv · 2019
I derive practical formulas for optimal arrangements between sophisticated stock market investors (namely, continuous-time Kelly gamblers or, more generally, CRRA investors) and the brokers who lend them cash for leveraged bets on a high Sharpe asset (i.e. the market portfolio). Rather than, say, the broker posting a monopoly price for margin loans, the gambler agrees to use a greater quantity of margin debt than he …
Alex Garivaltis
arXiv · arXiv · 2018
A Markov-chain model is developed for the purpose estimation of the cure rate of non-performing loans. The technique is performed collectively, on portfolios and it can be applicable in the process of calculation of credit impairment. It is efficient in terms of data manipulation costs which makes it accessible even to smaller financial institutions. In addition, several other applications to portfolio optimization a…
Vilislav Boutchaktchiev
arXiv · arXiv · 2016
We propose a new model of the liquidity driven banking system focusing on overnight interbank loans. This significant branch of the interbank market is commonly neglected in the banking system modeling and systemic risk analysis. We construct a model where banks are allowed to use both the interbank and the securities markets to manage their liquidity demand and supply as driven by prudential requirements in a volati…
Paweł Smaga, Mateusz Wiliński, Piotr Ochnicki, Piotr Arendarski, Tomasz Gubiec
arXiv · arXiv · 2013
In 1979 following a decade of hyperinflation, Iceland introduced Verðtryggð lán, negatively amortised, index-linked loans whose outstanding principal is increased by the rate of the consumer price inflation index(CPI). The loans were part of a general government policy which used indexation to the CPI to address the economic consequences of the hyperinflation. Although most other forms of indexation were subsequently…
Jacky Mallett
arXiv · arXiv · 2009
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…
Jacky Mallett
arXiv · arXiv · 2023
The IFRS 9 accounting standard requires the prediction of credit deterioration in financial instruments, i.e., significant increases in credit risk (SICR). However, the definition of such a SICR-event is inherently ambiguous, given its current reliance on evaluating the change in the estimated probability of default (PD) against some arbitrary threshold. We examine the shortcomings of this PD-comparison approach and …
Arno Botha, Esmerelda Oberholzer, Janette Larney, Riaan de Jongh