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Multiple lending, credit lines and financial contagion

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  • Cappelletti, Giuseppe
  • Mistrulli, Paolo Emilio

Abstract

Multiple lending has been widely investigated from both an empirical and a theoretical perspective. Nevertheless, the implications of multiple lending for the stability of the banking system still need to be understood. By lending to a common set of borrowers, banks are interconnected and then exposed to financial contagion phenomena, even if not directly. In this paper, we investigate a specific type of externality that originates from those borrowers that obtain liquidity from more than one bank. In this case, contagion may occur if a bank hit by a liquidity shock calls in some loans and borrowers then pay them back by drawing money from other banks. We show that, under certain circumstances that make other sources of liquidity unavailable or too costly, multiple lending might be responsible for a large liquidity shortage. JEL Classification: G21, G28

Suggested Citation

  • Cappelletti, Giuseppe & Mistrulli, Paolo Emilio, 2017. "Multiple lending, credit lines and financial contagion," Working Paper Series 2089, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172089
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    References listed on IDEAS

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    4. Cappelletti, Giuseppe & Guazzarotti, Giovanni, 2017. "The role of counterparty risk and asymmetric information in the interbank market," Working Paper Series 2022, European Central Bank.
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    9. Mistrulli, Paolo Emilio, 2011. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1114-1127, May.
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    More about this item

    Keywords

    credit lines; financial contagion; interbank market; multiple lending; systemic risk;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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