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We study financial networks where banks are connected by debt contracts. Weconsider the operation of debt swapping when two creditor banks decide toexchange an incoming payment obligation, thus leading to a locally differentnetwork structure. We say that a swap is positive if it is beneficial for bothof the banks involved; we can interpret this notion either with respect to theamount of assets received by the banks, or their exposure to different shocksthat might hit the system.  We analyze various properties of these swapping operations in financialnetworks. We first show that there can be no positive swap for any pair ofbanks in a static financial system, or when a shock hits each bank in thenetwork proportionally. We then study worst-case shock models, when a shock ofgiven size is distributed in the worst possible way for a specific bank. If thegoal of banks is to minimize their losses in such a worst-case setting, then apositive swap can indeed exist. We analyze the effects of such a positive swapon other banks of the system, the computational complexity of finding a swap,and special cases where a swap can be found efficiently. Finally, we alsopresent some results for more complex swapping operations when the banks swapmultiple contracts, or when more than two banks participate in the swap.

Debt Swapping for Risk Mitigation in Financial Networks