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Marriott Marquis, Grand Ballroom 13
American Economic Association
Financial Networks, Regulation, and Systemic Risk
Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Michael Kiley, Federal Reserve Board
Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability
AbstractWe develop a framework for analyzing how banks can be incentivized to make contributions to a voluntary bail-in and ascertaining the kinds of interbank linkages that are most conducive to a bail-in. A bail-in is possible only when the regulator's threat to not bail out insolvent banks is credible. Incentives to join a rescue consortium are stronger in networks where banks have a high exposure to default contagion, and weaker if banks realize that a large fraction of the benefits resulting from their contributions accrue to others. Our results reverse existing presumptions about the relative merits of different network topologies for moderately large shock sizes: while diversification effects reduce welfare losses in models without intervention, they inhibit the formation of bail-ins by introducing incentives for free-riding. We provide a nuanced understanding of why certain network structures are preferable, identifying the impact of the network structure on the credibility of bail-in proposals.
Regulating Financial Networks Under Uncertainty
AbstractI study the problem of regulating a network of interdependent financial institutions when there is uncertainty regarding its precise structure. I show that such uncertainty reduces the scope for welfare improving regulations. Although acquiring institution-level information potentially reduces this uncertainty, it does not always lead to welfare improving interventions. Under certain conditions, regulation that reduces the risk-taking incentives of a small set of institutions can improve welfare. The size and composition of such a set crucially depends on the cost of acquiring institution-level information, the cost of regulating institutions, and investors' preferences.
Bank Holdings and Systemic Risk
AbstractWe propose a novel approach to estimate the portfolio composition of banks as function of interbank trades and stock returns. While banks' assets are reported to regulators and/or the public at relatively low frequencies (e.g. quarterly or annually), our approach estimates bank asset holdings at higher frequencies allowing us to derive precise estimates of (i) portfolio concentration within each bank (a measure of diversification) and (ii) common holdings across banks (a measure of market susceptibility to propagating shocks). We find evidence that systemic risk measures derived from our approach lead, in a forecasting sense, several commonly used systemic risk indicators.
University of Cape Town, Deutsche Bundesbank, & Massachusetts Institute of Technology
Washington University-St. Louis
Federal Reserve Board
- G1 - General Financial Markets
- G2 - Financial Institutions and Services