Financial System

Abstract

In a financial system of interlocking balance sheets, the assets of creditors are the liabilities of debtors. A change in the value of underlying assets can ripple through the financial system through valuation changes on balance sheets. Tarski’s fixed point theorem guarantees the existence of consistent valuations. Under mild regularity conditions, there is a unique fixed point. Comparative statics analysis can be used to show how systemic risk propagates.