Balance sheet and seniority constraints on the repayment value of claims

Padellini, Mauro (2021): Balance sheet and seniority constraints on the repayment value of claims.

Abstract

The problem is addressed of how (different types of) funding transactions may affect the repayment value of (credit or equity) claims; to this purpose a novel prove for the existence and uniqueness of the payment vector, which does not make (explicit) use of the fixed point theorem and allows for the presence of claims with different seniorities (i.e. credit and equity claims), is proposed. Different components of the overall displacement (the reduction of repayment value), related to i) seniority structure, ii) network of bilateral exposure and iii) imbalances between external loss and external capital, are calculated by sequentially relaxing different constraints in the mixed linear program used for calculating overall displacement. The possibility that more credit may reduce overall displacement (due to borrowing-from-Peter-to-pay-Paul effect) and more equity capital may on the contrary increase overall displacement (due to its role in the transmission of financial displacement) is exemplified, along with the possible negative dependence of relative displacement (the ratio between overall displacement and total claims) on total claims.

• Item Type: MPRA Paper
• Language: English
• Keywords: Balance sheet, leverage
• Subjects: G - Financial Economics > G0 - General > G01 - Financial Crises; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting

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