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

58 Pages Posted: 14 Apr 2017 Last revised: 16 Aug 2017

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)

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Date Written: August 15, 2017

Abstract

This paper develops a framework to analyze welfare losses in an interbank network, in which subsidized bail-ins or public bailouts can be coordinated to stop financial contagion. Banks are willing to contribute to a bail-in only if the social planner's threat to not bail out insolvent banks is credible. The possibility of strategic intervention reverses the presumptions in earlier works and promotes sparsely connected networks over densely connected ones because (i) the no-intervention threat exhibits a phase transition and becomes more credible for large shocks and (ii) banks' contributions to the coordinated bail-in plan are larger.

Keywords: Systemic Risk, Bail-Ins, Bail-Outs, Connectivity, 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 (August 15, 2017). Columbia Business School Research Paper No. 17-45. Available at SSRN: https://ssrn.com/abstract=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 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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