Bail-Ins and Bail-Outs: Incentives, Connectivity, and Systemic Stability

52 Pages Posted: 14 Apr 2017 Last revised: 2 Oct 2019

See all articles by Benjamin Bernard

Benjamin Bernard

University of California, Los Angeles (UCLA) - Department of Economics

Agostino Capponi

Columbia University

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2019

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: Systemic Risk, Bail-Ins, Bail-Outs, Credibility, Financial Stability

JEL Classification: G01, D85, L14

Suggested Citation

Bernard, Benjamin and Capponi, Agostino and Stiglitz, Joseph E., Bail-Ins and Bail-Outs: Incentives, Connectivity, and Systemic Stability (October 1, 2019). Columbia Business School Research Paper No. 17-45. Available at SSRN: https://ssrn.com/abstract=2951448 or http://dx.doi.org/10.2139/ssrn.2951448

Benjamin Bernard

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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