A lending scheme for a system of interconnected banks with probabilistic constraints of failure. (October 2020)

• Record Type: Journal Article
• Authors: Cordoni, Francesco Giuseppe; Di Persio, Luca; Prezioso, Luca
• Is Part Of: Automatica. Volume 120(2020)
• Publication Date: 2020-10
• Subjects: Hamilton–Jacobi–Bellman equations -- Optimal control -- Terminal probability constraints -- Bank failure; Automatic control -- Periodicals; Automation -- Periodicals; 629.805
• DOI: 10.1016/j.automatica.2020.109111
• Languages: English
• ISSNs: 0005-1098

Abstract

Abstract: We derive a closed form solution for an optimal control problem related to an interbank lending schemes subject to terminal probability constraints on the failure of banks which are interconnected through a financial network. The derived solution applies to a real banks network by obtaining a general solution when the aforementioned probability constraints are assumed for all the banks. We also present a direct method to compute the systemic relevance parameter for each bank within the network.