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1. Systemic risk models for disjoint and overlapping groups with equilibrium strategies

   https://doi.org/10.1515/strm-2022-0004  

   Feng, Yichen; Fouque, Jean-Pierre; Hu, Ruimeng; Ichiba, Tomoyuki (January 2023, Statistics & Risk Modeling)

   Abstract We analyze the systemic risk for disjoint and overlapping groups of financial institutions by proposing new models with realistic game features.Specifically, we generalize the systemic risk measure proposed in[F. Biagini, J.-P. Fouque, M. Frittelli and T. Meyer-Brandis, On fairness of systemic risk measures, Finance Stoch. 24 (2020), 2, 513–564]by allowing individual banks to choose their preferred groups instead of being assigned to certain groups.We introduce the concept of Nash equilibrium for these new models, and analyze the optimal solution under Gaussian distribution of the risk factor.We also provide an explicit solution for the risk allocation of the individual banks and study the existence and uniqueness of Nash equilibrium both theoretically and numerically.The developed numerical algorithm can simulate scenarios of equilibrium, and we apply it to study the banking structure with real data and show the validity of the proposed model. 

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2. Stress tests and information disclosure: An experimental analysis

   https://doi.org/10.1016/j.jbankfin.2022.106691  

   Cox, Caleb; Davis, Douglas; Korenok, Oleg; Lightle, John (September 2023, Journal of Banking & Finance)

   Kirchler, Michael; Weitzel, Utz (Ed.)

   To improve the stability of the banking system the Dodd-Frank Act mandates that central banks conduct periodic evaluations of banks’ financial conditions. An intensely debated aspect of these ‘stress tests’ re- gards how much of that information generated by stress tests should be disclosed to financial markets. This paper uses an environment constructed from a model by Goldstein and Leitner (2018) to gain some behavioral insight into the policy tradeoffs associated with disclosure. Experimental results indicate that variations in disclosure conditions are sensitive to overbidding for bank assets. Absent overbidding, how- ever, optimal disclosure robustly improves risk sharing even when banks behave non-optimally. 

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3. Dynamic contagion in a banking system with births and defaults

   https://doi.org/10.1007/s10436-019-00351-2  

   Ichiba, Tomoyuki; Ludkovski, Michael; Sarantsev, Andrey. (January 2019, Annals of finance)

   We consider a dynamic model of interconnected banks. New banks can emerge, and existing banks can default, creating a birth-and-death setup. Microscopically, banks evolve as independent geometric Brownian motions. Systemic effects are captured through default contagion: as one bank defaults, reserves of other banks are reduced by a random proportion. After examining the long-term stability of this system, we investigate mean-field limits as the number of banks tends to infinity. Our main results concern the measure-valued scaling limit which is governed by a McKean–Vlasov jump-diffusion. The default impact creates a mean-field drift, while the births and defaults introduce jump terms tied to the current distribution of the process. Individual dynamics in the limit is described by the propagation of chaos phenomenon. In certain cases, we explicitly characterize the limiting average reserves. 

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4. Bail-ins and Bailouts: Incentives, Connectivity, and Systemic Stability

   Agostino Capponi, Benjamin Bernard (January 2022, The journal of political economy)

   Harald Uhlig (Ed.)

   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 financial 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 with government bailouts only, sparse networks enhance welfare 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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5. Bail-ins and Bailouts: Incentives, Connectivity, and Systemic Stability

   Benjamin Bernard, Agostino Capponi (January 2022, The journal of political economy)

   Harald Uhlig (Ed.)

   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 fi nancial 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 with government bailouts only, sparse networks enhance welfare 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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