DefaultRisk.com the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search
pa_corr_22


Submit Your Paper

In Rememberance: World Trade Center (WTC)

Export citation to:
- HTML
- Text (plain)
- BibTeX
- RIS
- ReDIF

Tian, Suhua, Yunhong Yang, Gaiyan Zhang, "Bank Capital, Interbank Contagion, and Bailout Policy", Fourthcoming in: Journal of Banking & Finance

Abstract: This paper develops a theoretical framework in which asset linkages in a syndicated loan agreement can infect a healthy bank when its partner bank fails. We investigate how capital constraints affect the choice of the healthy bank to takeover or liquidate the exposure held jointly with the failing bank, and how the bank’s ex ante optimal capital holding and possibility of contagion are affected by anticipation of bail-out policy, capital requirements and the joint exposure. We identify a range of factors that strengthen or weaken the possibility of contagion and bailout. Recapitalization with common stock rather than preferred equity injection dilutes existing shareholder interests and gives the bank a greater incentive to hold capital to cope with potential contagion. Increasing the minimum regulatory capital does not necessarily reduce contagion, while the requirement of holding conservation capital buffer could increase the bank's resilience to avoid contagion.

JEL Classification: G21, E42, L51.

Keywords: Interbank linkages, Optimal capital holding, Contagion, Bailout policy, Regulatory capital requirement, Takeover, Liquidation.

Download paper (510K PDF) 44 pages

Most Cited Books within Correlation/Dependence Papers

[