Benjamin Bernard

We develop a framework for analyzing how banks can be incentivized to make contributions to a voluntary bail-in and ascertaining the kinds of interbank linkages that are most conducive to a bail-in. A bail-in is possible only when the regulator's threat to not bail out insolvent banks is credible. Incentives to join a rescue consortium are stronger in networks where banks have a high exposure to default contagion, and weaker if banks realize that a large fraction of the benefits resulting from their contributions accrue to others. Our results reverse existing presumptions about the relative merits of different network topologies for moderately large shock sizes: while diversification effects reduce welfare losses in models without intervention, they inhibit the formation of bail-ins by int...