Algorithms for Claims Trading
Martin Hoefer, Carmine Ventre, Lisa Wilhelmi
TL;DR
The paper studies claims trading as a market-driven mechanism to rescue distressed banks within financial networks modeled after the Eisenberg–Noe clearing framework. It proves that no trade can strictly improve both the creditor and the buyer, so the analysis focuses on creditor-positive trades, and develops polynomial-time methods to optimize trades for fixed incoming-edge sets and to decide feasibility when the set is to be chosen, including a bicriteria $FPTAS$ for approximation. For single-claim trades, a return network $\mathcal{F}^{\text{ret}}$ is introduced to model haircut-based returns and to characterize optimal trades, with extensions to general monotone payment functions. When multiple claims are involved, the problems become NP-hard in general, but a bicriteria $FPTAS$ is provided for subset selection, and the complexity differs between ranking-based and proportional payment schemes. Overall, the work provides algorithmic tools and complexity results to support efficient, market-driven rescue packages and to understand the computational boundaries of claims trading in financial networks.
Abstract
The recent banking crisis has again emphasized the importance of understanding and mitigating systemic risk in financial networks. In this paper, we study a market-driven approach to rescue a bank in distress based on the idea of claims trading, a notion defined in Chapter 11 of the U.S. Bankruptcy Code. We formalize the idea in the context of financial networks by Eisenberg and Noe. For two given banks v and w, we consider the operation that w takes over some claims of v and in return gives liquidity to v to ultimately rescue v. We study the structural properties and computational complexity of decision and optimization problems for several variants of claims trading. When trading incoming edges of v, we show that there is no trade in which both banks v and w strictly improve their assets. We therefore consider creditor-positive trades, in which v profits strictly and w remains indifferent. For a given set C of incoming edges of v, we provide an efficient algorithm to compute payments by w that result in maximal assets of v. When the set C must also be chosen, the problem becomes weakly NP-hard. Our main result here is a bicriteria FPTAS to compute an approximate trade. The approximate trade results in nearly the optimal amount of assets of v in any exact trade. Our results extend to the case in which banks use general monotone payment functions and the emerging clearing state can be computed efficiently. In contrast, for trading outgoing edges of v, the goal is to maximize the increase in assets for the creditors of v. Notably, for these results the characteristics of the payment functions of the banks are essential. For payments ranking creditors one by one, we show NP-hardness of approximation within a factor polynomial in the network size, when the set of claims C is part of the input or not. Instead, for proportional payments, our results indicate more favorable conditions.