Debt Transfers in Financial Networks: Complexity and Equilibria

Panagiotis Kanellopoulos, Maria Kyropoulou, Hao Zhou

Abstract: We consider the operation of debt transfer in interbank networks. In particular, assuming a financial system that is represented by a network of banks and their bilateral debt contracts, we consider the setting where a bank can transfer the right to claim a debt to one of its lenders, under some assumptions. Perhaps surprisingly, such an operation can benefit the banks involved, and potentially the entire network as well, in terms of maximizing natural objectives related to financial well-being, like total assets and equity.We consider debt transfers in both a centralized and a distributed (game-theoretic) setting. First, we examine the computational complexity of computing debt transfer combinations that maximize total payments or total equity, or satisfy other desirable properties. We then study debt transfer operations from a game-theoretic standpoint. We formally define games that emerge when banks can be strategic about choosing whether or not to transfer their debt claims. We prove theoretical results on the existence and quality of pure Nash equilibria in debt transfer games, as well as the computational complexity of relevant problems. We complement our theoretical study with an empirical analysis involving different heuristics about computing debt transfer combinations, as well as game-playing dynamics of debt transfer operations on synthetic data.