NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Benjamin Bernard

University of California, Los Angeles
315 Portola Plaza
Bunche Hall 9242
Los Angeles, CA 90095

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Institutional Affiliation: UCLA

NBER Working Papers and Publications

August 2017Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability
with Agostino Capponi, 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.
 
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