arXiv · arXiv q-fin · 2026
We develop a model of interbank networks with random liquidity shocks. Networks of dilutable debt---e.g., long-term, unsecured---facilitate efficient liquidity transfers: Shocked banks pledge interbank claims as collateral for new senior debt, diluting existing debt. Unlike with non-dilutable debt, indebtedness and connectedness are sources of stability, not fragility. Dilution is thus a ``backdoor bail-in'' that rea…
Jason Roderick Donaldson, Giorgia Piacentino, Xiaobo Yu
arXiv · arXiv q-fin · 2014
To mitigate potential contagion from future banking crises, the European Commission recently proposed a framework which would provide for the $\textit{bail-in}$ of bank creditors in the event of failure. In this study, we examine this framework retrospectively in the context of failed European banks during the global financial crisis. Empirical findings suggest that equity and subordinated bond holders would have bee…
Thomas Conlon, John Cotter
arXiv · arXiv q-fin · 2014
Since beginning of the 2008 financial crisis almost half a trillion euros have been spent to financially assist EU member states in taxpayer-funded bail-outs. These crisis resolutions are often accompanied by austerity programs causing political and social friction on both domestic and international levels. The question of how to resolve failing financial institutions under which economic preconditions is therefore a…
Peter Klimek, Sebastian Poledna, J. Doyne Farmer, Stefan Thurner
arXiv · arXiv q-fin · 2026
We investigate a joint optimization problem of dividend payments and capital injections for a surplus process driven by a general diffusion. Dividend payments are assumed to be absolutely continuous in time, with the dividend rate bounded by a nonnegative concave function of the current surplus; while capital injections are modelled by a general nondecreasing process. We first analyze an auxiliary bail-out problem in…
Hélène Guérin, Dante Mata, Jean-François Renaud, Alexandre Roch
arXiv · arXiv q-fin · 2025
Community bail funds (CBFs) assist individuals who have been arrested and cannot afford bail, preventing unnecessary pretrial incarceration along with its harmful or sometimes fatal consequences. By posting bail, CBFs allow defendants to stay at home and maintain their livelihoods until trial. This paper introduces new stochastic models that combine queueing theory with classic insurance risk models to capture the dy…
Yidan Zhang, Jamol Pender
arXiv · arXiv q-fin · 2023
We consider an optimal stochastic control problem in which a firm's cash/surplus process is controlled by dividend payments and capital injections. Stockholders aim to maximize their dividend stream minus the cost of injecting capital, if needed. We consider absolutely continuous dividend policies subject to a level-dependent upper bound on the dividend rate while we allow for general capital injections behavior. We …
Jean-François Renaud, Alexandre Roch, Clarence Simard
arXiv · arXiv q-fin · 2022
In portfolio compression, market participants (banks, organizations, companies, financial agents) sign contracts, creating liabilities between each other, which increases the systemic risk. Large, dense markets commonly can be compressed by reducing obligations without lowering the net notional of each participant (an example is if liabilities make a cycle between agents, then it is possible to reduce each of them wi…
Mihály Péter Hanics
arXiv · arXiv q-fin · 2022
The core of the research is to provide the explicit expression for the expected net present values (NPVs) of double barrier strategies for regular diffusions on the real line without solving differential equations. Under the so-called bail-out setting, the value of the expected NPVs of an insurance company varies according to the choice of a pair of policies, which consist of dividend payments paid out and capital in…
Chongrui Zhu
arXiv · arXiv q-fin · 2021
We consider networks of banks with assets and liabilities. Some banks may be insolvent, and a central bank can decide which insolvent banks, if any, to bail out. We view bailouts as an optimization problem where the central bank has given resources at its disposal and an objective it wants to maximize. We show that under various assumptions and for various natural objectives this optimization problem is NP-hard, and …
Beni Egressy, Roger Wattenhofer
arXiv · arXiv q-fin · 2021
We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash in order to limit defaults to a given proportion of entities. We prove that the value of the central agent's control problem converges as the number of defaultab…
Christa Cuchiero, Christoph Reisinger, Stefan Rigger
arXiv · arXiv q-fin · 2019
This paper studies the bail-out optimal dividend problem with regime switching under the constraint that the cumulative dividend strategy is absolutely continuous. We confirm the optimality of the regime-modulated refraction-reflection strategy when the underlying risk model follows a general spectrally negative Markov additive process. To verify the conjecture of a barrier type optimal control, we first introduce an…
Kei Noba, José-Luis Pérez, Xiang Yu
arXiv · arXiv q-fin · 2017
This paper studies the optimal dividend problem with capital injection under the constraint that the cumulative dividend strategy is absolutely continuous. We consider an open problem of the general spectrally negative case and derive the optimal solution explicitly using the fluctuation identities of the refracted-reflected Lévy process. The optimal strategy as well as the value function are concisely written in ter…
José-Luis Pérez, Kazutoshi Yamazaki, Xiang Yu
arXiv · arXiv q-fin · 2013
The importance of the global financial system cannot be exaggerated. When a large financial institution becomes problematic and is bailed out, that bank is often claimed as "too big to fail". On the other hand, to prevent bank's failure, regulatory authorities adopt the Prompt Corrective Action (PCA) against a bank that violates certain criteria, often measured by its leverage ratio. In this article, we provide a fra…
Masahiko Egami, Tadao Oryu
arXiv · arXiv q-fin · 2011
We investigate the use of the Hurst exponent, dynamically computed over a moving time-window, to evaluate the level of stability/instability of financial firms. Financial firms bailed-out as a consequence of the 2007-2010 credit crisis show a neat increase with time of the generalized Hurst exponent in the period preceding the unfolding of the crisis. Conversely, firms belonging to other market sectors, which suffere…
Raffaello Morales, T. Di Matteo, Ruggero Gramatica, Tomaso Aste
arXiv · arXiv q-fin · 2010
Inspired by the bankruptcy of Lehman Brothers and its consequences on the global financial system, we develop a simple model in which the Lehman default event is quantified as having an almost immediate effect in worsening the credit worthiness of all financial institutions in the economic network. In our stylized description, all properties of a given firm are captured by its effective credit rating, which follows a…
Paweł Sieczka, Didier Sornette, Janusz A. Hołyst