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Cambridge Finance Workshop - Agostino Capponi

Cambridge Finance Workshop Series are usually held on Thursdays during term time. The workshops are an opportunity for those working in finance to present their latest results or papers.
When Feb 23, 2017
from 01:00 PM to 02:00 PM
Where Room W4.03, Cambridge Judge Business School
Contact Name
Contact Phone 01223768129
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Agostino Capponi is Assistant Professor at Columbia University's IEOR Department.

His main research interests are in the area of networks, with a special focus on systemic risk, contagion, and control. In the context of financial networks, the outcome of his research contributes to a better understanding of risk management practices, and to assess the impact of regulatory policies aimed at controlling financial markets. He has been awarded a grant from the Institute for New Economic Thinking for his research on dynamic contagion mechanisms.

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

 

Abstract:

We analyze the stability of an interbank network, in which rescues in the form of subsidized bail-ins or public bailouts can be coordinated to stop financial contagion. The coordination of a rescue consortium between a benevolent social planner and the banks is modeled as a sequential game. We show that the equilibrium welfare losses are generically unique, depending heavily
on the network structure, which influences whether or not the social planner's threat to not intervene is credible. We provide conditions under which the threat is credible and characterize the optimal intervention plan.

Our analysis shows that sparsely connected networks may enhance financial stability in two ways: (i) a smaller amplification of the shock without intervention may enhance credibility of the social planner's threat and (ii) because default resolution costs are concentrated, the creditors of defaulting banks can be incentivized to make large contributions to a subsidized bail-in. This may make a sparsely connected network socially preferable over a more densely connected network, even if the densely connected network is financially more stable
in the absence of any intervention.

 

Based on joint work with Benjamin Bernard and Joseph Stiglitz.

 

 

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