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Decentralized Clearing in Financial Networks

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  • Péter Csóka

    (Department of Finance, Corvinus Business School, Corvinus University of Budapest, 1093 Budapest, Hungary; “Momentum” Game Theory Research Group, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, 7621 Pécs, Hungary)

  • P. Jean-Jacques Herings

    (Department of Economics, Maastricht University, 6200 MD Maastricht, Netherlands)

Abstract

We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents’ assets might be insufficient to satisfy their liabilities, leading to defaults. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Since clearing payment matrices and the corresponding values of equity are not uniquely determined, we provide bounds on the possible levels equity can take. Unlike the existing literature, which studies centralized clearing procedures, we introduce a large class of decentralized clearing processes. We show the convergence of any such process in finitely many iterations to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.

Suggested Citation

  • Péter Csóka & P. Jean-Jacques Herings, 2018. "Decentralized Clearing in Financial Networks," Management Science, INFORMS, vol. 64(10), pages 4681-4699, October.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:10:p:4681-4699
    DOI: 10.287/mnsc.2017.2847
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    More about this item

    Keywords

    networks; bankruptcy problems; systemic risk; decentralized clearing; indivisibilities; blockchain;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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