To bail-out or to bail-in? Answers from an agent-based model

DOI10.1016/J.JEDC.2014.08.020MaRDI QIDQ1623970zbMATH OpenOpenAlexFDO

Authors Peter Klimek, Sebastian Poledna, J. Doyne Farmer, Stefan Thurner

Publication date 15 November 2018

Published in Journal of Economic Dynamics and Control (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1403.1548, http://pure.iiasa.ac.at/id/eprint/11531/1/To%20bail-out%20or%20to%20bail-in.pdf

zbMATH Keywords

agent-based modelbail-inbail-outcrisis resolution

Mathematics Subject Classification ID

Financial applications of other theories (91G80) Heterogeneous agent models (91B69)

Abstract: 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 pressing and controversial issue of vast political importance. In this work we employ an agent-based model to study the economic and financial ramifications of three highly relevant crisis resolution mechanisms. To establish the validity of the model we show that it reproduces a series of key stylized facts if the financial and real economy. The distressed institution can either be closed via a purchase & assumption transaction, it can be bailed-out using taxpayer money, or it may be bailed-in in a debt-to-equity conversion. We find that for an economy characterized by low unemployment and high productivity the optimal crisis resolution with respect to financial stability and economic productivity is to close the distressed institution. For economies in recession with high unemployment the bail-in tool provides the most efficient crisis resolution mechanism. Under no circumstances do taxpayer-funded bail-out schemes outperform bail-ins with private sector involvement.

Recommendations

• Interbank contagion and resolution procedures: inspecting the mechanism
• Allocating losses: bail-ins, bailouts and bank regulation
• Introduction special issue crises and complexity
• Fiscal and monetary policies in complex evolving economies
• The Fiscal Cost of Financial Instability

Cites work

• A model to analyse financial fragility
• A network analysis of the Italian overnight money market
• Bank Runs, Deposit Insurance, and Liquidity
• Default and Punishment in General Equilibrium1
• Elimination of systemic risk in financial networks by means of a systemic risk transaction tax
• Equilibrium analysis, banking and financial instability.
• Income distribution, credit and fiscal policies in an agent-based Keynesian model
• Leverage causes fat tails and clustered volatility
• Macroeconomics from the bottom-up
• Network topology of the interbank market
• Schumpeter meeting Keynes: a policy-friendly model of endogenous growth and business cycles

Cited in

(12)

• The Fiscal Cost of Financial Instability
• Winter is possibly not coming: mitigating financial instability in an agent-based model with interbank market
• Sovereign default contagion and monetary policy in an agent-based model
• Resolution of financial crises
• Basel III capital surcharges for G-SIBs are far less effective in managing systemic risk in comparison to network-based, systemic risk-dependent financial transaction taxes
• Elimination of systemic risk in financial networks by means of a systemic risk transaction tax
• Introduction special issue crises and complexity
• CONTAGION IN HETEROGENEOUS FINANCIAL NETWORKS
• Quantifying the concerns of Dimon and Buffett with data and computation
• The impacts of interest rates on banks' loan portfolio risk-taking
• Austerity, assistance and institutions: lessons from the Greek sovereign debt crisis
• Let the Worst One Fail: A Credible Solution to the Too-Big-To-Fail Conundrum

This page was built for publication: To bail-out or to bail-in? Answers from an agent-based model

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q1623970)