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We present a simple continuous-time model of clearing in financial networks.Financial firms are represented as "tanks" filled with fluid (money), flowingin and out. Once "pipes" connecting "tanks" are open, the system reaches theclearing payment vector in finite time. This approach provides a simplerecursive solution to a classical static model of financial clearing inbankruptcy, and suggests a practical payment mechanism. With sufficientresources, a system of mutual obligations can be restructured into anequivalent system that has a cascade structure: there is a group of banks thatpaid off their debts, another group that owes money only to banks in the firstgroup, and so on. Technically, we use the machinery of Markov chains to analyzeevolution of a deterministic dynamical system.

Banks as Tanks: A Continuous-Time Model of Financial Clearing