Why did sponsor banks rescue their SIVs?

Anatoli Segura

No 1100, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: At the beginning of the recent financial crisis, sponsoring banks rescued their structured investment vehicles (SIVs) despite having no contractual obligation to do so. I show that this outcome may arise as the equilibrium of a signaling game between banks and their debt investors when a negative shock affects the correlated asset returns of a fraction of banks and their sponsored vehicles. A rescue is interpreted as a good signal and reduces the refinancing costs of the sponsoring bank. If banks leverage is high or the negative shock is sizeable enough, the equilibrium is a pooling one in which all banks rescue. When the aggregate financial sector is close to insolvency, banks expected net worth would increase if rescues were banned. The model can be extended to discuss the circumstances in which all banks collapse after rescuing their vehicles.

Keywords: reputation risk; rescues; mispricing; implicit support; shadow banking system (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-cta
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1100_17

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