Chained financial contracts and global banks

- This paper studies chained credit contracts between households, bank and firms.
- Optimal solution has a simple structure resembling the financial accelerator.
- An example of chained credit contracts in global banks is discussed.
- Global banks causes positive comovements in external finance premia.

This paper studies a chained credit contract based on Hirakata et al. (2013) in which investors lend funds to banks and banks lend to entrepreneurs in an imperfect financial market. We show that the optimality condition of this contract has a simple, symmetric structure analogous to the one in Bernanke, Gertler and Gilchrist (1999), and that the external finance premium is increasing in both the entrepreneurs' and the bank's capital to net worth ratio. We apply the chained credit contract to analyse global banks, and show that the common lender effect drives the positive comovement of the external finance premia across economies.