Optimal equity infusions in interbank networks

Hamed Amini, Andreea Minca, Agnès Sulem

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We study optimal equity infusions into a financial network prone to the risk of contagious failures, which may be due to insolvency or to bank runs by short term creditors. Bank runs can be triggered by failures of connected banks. Under complete information on interbank linkages, we show that the problem reduces to a combinatorial optimization problem. Subject to budget constraints, the government chooses the set of minimal cost whose survival induces the maximum network stability. Our results demonstrate that the optimal equity infusion might significantly mitigate failure contagion risk and stabilize the system. In the case of partial information on the network, the controllers’ focus swiftly changes from preventing insolvencies to preventing runs by short term creditors.

Original languageEnglish (US)
Pages (from-to)1-17
Number of pages17
JournalJournal of Financial Stability
Volume31
DOIs
StatePublished - Aug 2017

Keywords

  • Financial contagion
  • Liquidity risk
  • Markov decision process
  • Rollover risk
  • Systemic risk

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance(all)

Fingerprint

Dive into the research topics of 'Optimal equity infusions in interbank networks'. Together they form a unique fingerprint.

Cite this