Mudd Hall 535-G
500 W 120th St.
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Institutional Affiliation: Columbia University
NBER Working Papers and Publications
|May 2020||Optimal Bailouts and the Doom Loop with a Financial Network|
with Felix C. Corell, Joseph E. Stiglitz: w27074
Banks usually hold large amounts of domestic public debt which makes them vulnerable to their own sovereign’s default risk. At the same time, governments often resort to costly public bailouts when their domestic banking sector is in trouble. We investigate how the interbank network structure and the distribution of sovereign debt holdings jointly affect the optimal bailout policy in the presence of this "doom loop". Rescuing banks with high domestic sovereign exposure is optimal if these banks are sufficiently central in the network, even though that requires larger bailout expenditures than rescuing low-exposure banks. Our findings imply that highly central banks can use exposure to their own government as a strategic tool to increase the likelihood of being bailed out. Our model thus il...
|August 2017||Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability|
with Benjamin Bernard, Joseph E. Stiglitz: w23747
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.