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Cooperative resolution of crises in financial networks
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A1 Alkuperäisartikkeli tieteellisessä aikakauslehdessä
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en
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Annals of Operations Research
Abstract
Since the beginning of the financial crisis in 2007-2008, several mitigation policies have been considered to monitor and stabilize the financial system in the event of a shock. We examine the financial network of systemically important banks as a cooperative game. Governments can act as facilitators, enforcing incentives for banks to cooperate in voluntary bail-ins and prevent the escalation of the financial crisis. To incentivize the formation of a cooperative consortium, we consider (i) a threat tax on equity in case a cooperative rescue fails and (ii) assisted bail-ins, in which the regulator promises some financial support. To evaluate the characteristic function of the cooperative game, we employ a clearing payment model for alternative coalitions competing in the market. As a fair division concept, we use the proportional nucleolus which implies a possible subsidizing pattern among the banks. Group rationality requires the tax to exceed a minimum tax level that we introduce. While the tax is assumed fixed before the crisis starts, the regulator may find a minimal public subsidy to meet such group rationality requirement. For a demonstration, we used major European banks and scenarios that are linked to the adverse economic scenario used in the EU-wide stress testing of 2016.
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Publisher Copyright: © The Author(s) 2025.
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Kallio, M & Khabazian, A 2025, 'Cooperative resolution of crises in financial networks', Annals of Operations Research. https://doi.org/10.1007/s10479-025-06955-4