Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability

Add to your list(s) Download to your calendar using vCal

• Agostino Capponi (Columbia University)
• Thursday 23 February 2017, 13:00-14:00
• Room W4.03 Judge Business School.

If you have a question about this talk, please contact Cerf Admin.

We analyze the stability of an interbank network, in which rescues in the form of subsidized bail-ins or public bailouts can be coordinated to stop financial contagion. The coordination of a rescue consortium between a benevolent social planner and the banks is modeled as a sequential game. We show that the equilibrium welfare losses are generically unique, depending heavily on whether or not the social planner’s threat to not intervene is credible. We provide conditions under which the threat is credible and characterize the optimal intervention plan. Our analysis shows that sparsely connected networks may enhance financial stability in two ways: (i) a smaller amplification of the shock under no-intervention may enhance credibility of the social planner’s threat and (ii), because default resolution costs are concentrated, the creditors of defaulting banks can be incentivized to make large contributions to a subsidized bail-in. This may make a sparsely connected network socially preferable over a more densely connected network, even if the densely connected network was financially more stable in the absence of any intervention.

This talk is part of the Cambridge Finance Workshop Series series.

This talk is included in these lists:

• All Talks (aka the CURE list)
• CERF and CF Events
• Cambridge Finance Workshop Series
• Cambridge Judge Business School
• Interested Talks
• Room W4.03 Judge Business School

Note that ex-directory lists are not shown.