Why Did Sponsor Banks Rescue their SIVs? A Signaling Model of Rescues

47 Pages Posted: 28 Jan 2015

Date Written: June 16, 2014


At the beginning of the past financial crisis sponsoring banks rescued their structured investment vehicles (SIVs) despite of lack of 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. The 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 sizable 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

JEL Classification: G02, G03

Suggested Citation

Segura, Anatoli, Why Did Sponsor Banks Rescue their SIVs? A Signaling Model of Rescues (June 16, 2014). Available at SSRN: https://ssrn.com/abstract=2552475 or http://dx.doi.org/10.2139/ssrn.2552475

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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