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SUMMARY:Bail-ins and Bail-outs: Incentives\, Connectivity\, and Systemic S
 tability - Agostino Capponi (Columbia University)
DTSTART:20170223T130000Z
DTEND:20170223T140000Z
UID:TALK67125@talks.cam.ac.uk
CONTACT:Cerf Admin
DESCRIPTION:We analyze the stability of an interbank network\, in which re
 scues in the form of subsidized bail-ins or public bailouts can be coordin
 ated to stop financial contagion. The coordination of a rescue consortium 
 between a benevolent social planner and the banks is modeled as a sequenti
 al game. We show that the equilibrium welfare losses are generically uniqu
 e\, depending heavily on whether or not the social planner's threat to not
  intervene is credible. We provide conditions under which the threat is cr
 edible and characterize the optimal intervention plan.\nOur analysis shows
  that sparsely connected networks may enhance financial stability in two w
 ays: (i) a smaller amplification of the shock under no-intervention may en
 hance credibility of the social planner's threat and (ii)\, because defaul
 t resolution costs are concentrated\, the creditors of defaulting banks ca
 n be incentivized to make large contributions to a subsidized bail-in. Thi
 s may make a sparsely connected network socially preferable over a more de
 nsely connected network\, even if the densely connected network was financ
 ially more stable in the absence of any intervention.\n
LOCATION:Room W4.03 Judge Business School
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