Financial Networks, Cross Holdings, and Limited Liability
AbstractI discuss a network of banks which are linked with each other by financial obligations and cross holdings. Given an initial endowment the value of the obligations and the equity values of the banks are determined endogenously in a way consistent with the priority of debt and the limited liability of equity. Even though neither equity values nor debt values are necessarily unique the value of debt and equity holdings of outside investors is uniquely determined. An algorithm to calculate debt and equity values is developed.
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Bibliographic InfoPaper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 156.
Date of creation: 29 May 2009
Date of revision:
Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-07-11 (All new papers)
- NEP-BAN-2009-07-11 (Banking)
- NEP-NET-2009-07-11 (Network Economics)
- NEP-RMG-2009-07-11 (Risk Management)
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- Sabine Karl & Tom Fischer, 2013. "Cross-Ownership as a Structural Explanation for Over- and Underestimation of Default Probability," Papers 1301.6069, arXiv.org.
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