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

Benjamin Bernard (benbernard@ntu.edu.tw), Agostino Capponi (ac3827@columbia.edu) and Joseph Stiglitz
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Agostino Capponi: Department of Industrial Engineering and Operations Research, Columbia University

No 1901, Working Papers from National Taiwan University, Department of Economics

Abstract: This paper endogenizes intervention in financial crises as the strategic negotiation between a regulator and creditors of distressed banks. Incentives for banks to contribute to a voluntary bail-in arise from their exposure to credit and price-mediated contagion. In equilibrium, a bail-in is possible only if the regulator's threat to not bail out insolvent banks is credible. Contrary to models without intervention or government bailouts only, sparse networks are beneficial in our model for two main reasons: they improve the credibility of the regulator's no-bailout threat for large shocks and they reduce free-riding incentives among bail-in contributors when the threat is credible.

Keywords: Financial markets; Financial regulation and banking (search for similar items in EconPapers)
Pages: 87 pages
Date: 2017-10, Revised 2019-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Bail-Ins and Bailouts: Incentives, Connectivity, and Systemic Stability (2022)
Working Paper: Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability (2017)
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