Financial networks with singleton liability priorities (Q6104351)

This paper proposes a formal model of a financial network, consisting of financial entities (banks), their external assets and liabilities between them, in particular debt contracts and credit default swaps (CDSs). The model results to a coloured directed multigraph-like structure carrying all the relevant information. This graph structure is then utilized to consider payment schemes, aiming at the clearing problem for the liabilities of the financial entities. The authors study the clearing problem in this framework under the priority list payment scheme, and provide general results concerning its complexity. In particular, it is shown that when the the firms pay according to a singleton liability priority list, the clearing problem (which is related to a fixed point scheme) is FIXP-complete and provide a number of NP-hardness results for the computation of priority lists that optimise specific objectives. The results may be of relevance to risk management in financial networks.