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

This paper endogenizes intervention in financial crises as the strategic negotiation between a regulator and creditors of distressed banks. Incentives for banks to contribute voluntary bail-in arise from their exposure contagion. In equilibrium, is possible only if regulator’s threat not bail out insolvent credible. Contrary models without or with government bailouts only, sparse networks enhance welfare two main reasons: they improve credibility no-bailout large shocks, reduce free-riding incentives among contributors when