Optimal Control of Interbank Contagion under Complete Information
نویسندگان
چکیده
We study a preferred equity infusion government program set to mitigate interbank contagion. Financial institutions are prone to insolvency risk channeled through the network of interbank debt and to the risk of bank runs. The government seeks to maximize, under budget constraints, the total net worth of the financial system or, equivalently, to minimize the dead-weight losses induced by bank runs. The government is assumed to have complete information on interbank debt. The problem of quantifying the optimal amount of infusions can be expressed as a convex combinatorial optimization problem, tractable when the set of banks eligible for intervention (core banks) is sufficiently, yet realistically, small. We find that no bank has an incentive to withdraw from the program, when the preferred dividend rate paid to the government is equal to the government’s outside return on the intervention budget. On the other hand, it may be optimal for the government to make infusions in a strict subset of core banks.
منابع مشابه
Contagion at the interbank market with stochastic LGD
This paper investigates contagion at the German interbank market under the assumption of a stochastic loss given default (LGD). We combine a unique data set about the LGD of interbank loans with data about interbank exposures. We find that the frequency distribution of the LGD is u-shaped. Under the assumption of a stochastic LGD, simulation results show a more fragile banking system than under...
متن کاملOptimal Control for financial system with default contagion
Our work lies in the area of systemic risk in financial systems and focuses on the study of the tradeoff between financial contagion and benefit of connectivity. We consider a financial network described as a weighted directed graph, in which nodes represent financial institutions and edges the exposures between them. The distress propagation is modeled as an epidemics on this graph. We first s...
متن کاملRisk Contagion in Chinese Banking Industry: A Transfer Entropy-Based Analysis
What is the impact of a bank failure on the whole banking industry? To resolve this issue, the paper develops a transfer entropy-based method to determine the interbank exposure matrix between banks. This method constructs the interbank market structure by calculating the transfer entropy matrix using bank stock price sequences. This paper also evaluates the stability of Chinese banking system ...
متن کاملThe Effect of the Interbank Network Structure on Contagion and Common Shocks
This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Comparing different interbank network structures, it is shown that money-center networks are more sta...
متن کامل