Failure and Rescue in an Interbank Network

Rogers, L. C. G.; Veraart, Luitgard A. M.

doi:10.2139/ssrn.1932911

Cited by 124 publications

(237 citation statements)

References 23 publications

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“…It is shown that this algorithm terminates in at most n steps to the greatest clearing payment matrix. Variations on this algorithm have been presented in Rogers and Veraart (2013) and Elliott et al (2014).…”

Section: Decentralized Clearingmentioning

confidence: 99%

“…There is also a substantial literature that relates the number and magnitude of defaults to the network topology and that characterizes those structures that tend to propagate default, see Gai and Kapadia (2010), Elliott et al (2014), Acemoglu et al (2015), Capponi et al (2015), and Glasserman and Young (2015). The basic setup of Eisenberg and Noe (2001) has also been extended in various directions, for instance in Cifuentes et al (2005) and Shin (2008) by allowing for liquidity considerations or in Rogers and Veraart (2013) by allowing for costs of default.…”

Section: Introductionmentioning

confidence: 99%

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Decentralized Clearing in Financial Networks

Csóka

Herings

2016

SSRN Journal

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We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents' assets might be insufficient to satisfy their liabilities leading to defaults. We assume the primitives to be denoted in some unit of account. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. We present a convenient representation of bankruptcy rules. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Both clearing payment matrices and the corresponding values of equity are not uniquely determined. We provide bounds on the possible levels equity can take. We analyze decentralized clearing processes and show the convergence of any such process in finitely many steps to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure. Abstract We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents' assets might be insufficient to satisfy their liabilities leading to defaults. We assume the primitives to be denoted in some unit of account. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. We present a convenient representation of bankruptcy rules.A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Both clearing payment matrices and the corresponding values of equity are not uniquely determined. We provide bounds on the possible levels equity can take. We analyze decentralized clearing processes and show the convergence of any such process in finitely many steps to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.

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Section: Decentralized Clearingmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Decentralized Clearing in Financial Networks

Csóka

Herings

2016

SSRN Journal

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“…This is like in Rogers and Veraart (2012), where there are fixed liquidation costs when firms become insolvent.…”

Section: Financial Contagionmentioning

confidence: 93%

“…A recent example in this sense is Rogers and Veraart (2012), who use networks as decision tools for the establishment of rescue consortia.…”

Section: Introductionmentioning

confidence: 99%

Optimal control of interbank contagion under complete information

Minca

Sulem

2014

Statistics &Amp; Risk Modeling

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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.

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“…While we investigate their joint impact, up to now the literature has only been studying these factors separately: Bankruptcy costs are, for example, considered by Elsinger (2009), Elliott et al (2014), Rogers and Veraart (2013), and Glasserman and Young (2015); cross-holdings, e.g., by Elsinger (2009), Elliott et al (2014), Fischer (2014), Suzuki (2002), and Karl and Fischer (2014). Cifuentes et al (2005) incorporate fire sales into the setting of Eisenberg and Noe (2001); their approach is further extended by Amini et al (2013), Chen et al (2016), Gai and Kapadia (2010), Nier et al (2007), and Feinstein (2017).…”

Section: Introductionmentioning

confidence: 99%

The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks

Weber

Weske

2017

Probab Uncertain Quant Risk

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which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.Abstract The paper presents a comprehensive model of a banking system that integrates network effects, bankruptcy costs, fire sales, and cross-holdings. For the integrated financial market we prove the existence of a price-payment equilibrium and design an algorithm for the computation of the greatest and the least equilibrium. The number of defaults corresponding to the greatest price-payment equilibrium is analyzed in several comparative case studies. These illustrate the individual and joint impact of interbank liabilities, bankruptcy costs, fire sales and cross-holdings on systemic risk. We study policy implications and regulatory instruments, including central bank guarantees and quantitative easing, the significance of last wills of financial institutions, and capital requirements.

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Failure and Rescue in an Interbank Network

Cited by 124 publications

References 23 publications

Decentralized Clearing in Financial Networks

Decentralized Clearing in Financial Networks

Optimal control of interbank contagion under complete information

The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks

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