This paper analyzes financial contagion in a banking system where banks are linked to each other by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic liquidity shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the complete interbank network, in which each bank borrows evenly from all the others, displays the usual robust-yet-fragile property. However, in the more general case of heterogeneous common asset holdings the complete interbank network is less resilient than other incomplete networks but not necessarily the most fragile. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation.

In many countries, Mutual Loan-Guarantee Societies (MGSs) are assuming ever-increasing importance for small business lending. In this paper we provide a theory to rationalize the raison d’être of MGSs. The basic intuition is that the motivation for MGSs lies in the inefficiencies created by adverse selection, when borrowers do not have enough wealth to satisfy collateral requirements and induce self-selecting contracts. In this setting, we view MGSs as a wealth-pooling mechanism that allows otherwise inefficiently rationed borrowers to obtain credit.

This paper investigates whether firms’ access to credit is characterized by state dependence. We introduce a first-order Markov model of credit restriction with sample selection that makes it possible to identify state dependence in presence of unobserved heterogeneity. The results, based on a representative sample of Italian firms, show that state dependence in access to credit is a statistically and economically significant phenomenon and that this is more prominent among medium-large firms.