Financial networks with intermediation

Abstract

In this paper, we develop a framework for the modelling, analysis, and computation of solutions to financial network problems in the presence of intermediation. Specifically, we consider an economy consisting of three types of agents: those with sources of funds, such as households and firms; intermediary ones, such as banks, savings institutions, insurance companies, investment companies, etc, and, finally, the consumers located at demand markets corresponding to the uses of funds, such as household loans, real estate loans, business loans, etc. We address the behaviour of the agents, construct the hierarchical network, and demonstrate how the equilibrium financial flows, as well as the prices, can be determined using finite-dimensional variational inequality theory.