Description

In June 2007, at the start of the financial crisis, two funds owned and operated by Bear Stearns got into trouble. Less than a year later Bear Stearns effectively went bust, was bailed out by the Federal Reserve and later acquired by JP Morgan Chase. What effect might this intra-institutional spillover have on the wider financial system?

We build a stylized model of a financial system in which intermediaries are comprised of business units specialized in trading different types of assets. Assets are intermediated from sellers to buyers via exogenously fixed trading networks. We use this model to examine the effect of intra-institutional spillover on financial contagion across multiple trading networks. Using recent advances in the literature on percolation in coupled random networks we illustrate that contagion across multiple trading networks can be more severe than in an isolated network. In particular, contagion across multiple networks can lead to a sudden collapse of financial intermediation.

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