Systemic risk in financial systems: an axiomatic approach

Abstract

Eisenberg and Noe (2001) define a financial network where the players have claims against each other. In this system it is possible that one or several players do not have enough money to pay all their debts and default, being their total payment smaller than the total amount of their claims. Under the properties of Limited liability and Absolute priority and the bankruptcy rule of Proportionality, they prove that there exists a unique payment matrix if the system is regular. The aim of this paper to study whether these three properties are compatible or not with non-manipulability properties. In particular, we show that although agents may have incentives to split, they do not have incentives to merge.