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On the resolution of cross-liabilities

Author

Listed:
  • Gabrielle Demange

    (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract
In a variety of situations, entities in a system, for example firms in the financial sector, hold liabilities on each other. The reimbursement abilities are intertwined, thereby potentially generating coordination failures and a cascade of defaults calling for interventions. Interventions can be discretionary or designed by rules such as bankruptcy laws. Bankruptcy laws, however, manage the default of a single firm towards its creditors, without considering all those that could be affected indirectly by the resolution. To account for these indirect effects, resolution rules should be defined at the system level. This paper investigates such rules, assuming that the primary goal of the resolution is to avoid defaults on external debts, say, banks' defaults on deposits. Focusing on the proportionality principle, it defines and characterizes the constrained-proportional rule, building on two approaches: the minimization of an inequality measure of the reimbursements (made and received) and the axiomatization through desirable properties.

Suggested Citation

  • Gabrielle Demange, 2021. "On the resolution of cross-liabilities," Working Papers halshs-03151128, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03151128
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03151128
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    References listed on IDEAS

    as
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