Bank insolvencies, priority claims and systemic risk

We review an extensive literature debating the merits of alternative priority structures for banking liabilities put forward by financial economists, legal scholars and policymakers. Up to now, this work has focused exclusively on the relative advantages of each group of creditors to monitor the activities of bankers. We argue that systemic risk is another dimension that this discussion must include. The main message of our work is that when bank failures are contagious then when regulators assign priority rights need also to take into account how the bankruptcy resolution of one institution might affect the survival of other institutions that have acted as its creditors. When the network structure is fixed the solution is straightforward. Other banks should have priority to minimize the risk of their downfall. However, if the choice of policy can affect the structure of the network, policy design becomes more complex.This is a fruitful avenue for future research

Competition and Stability in Banking

I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition

Bailing out the Banks: Reconciling Stability and Competition

The financial crisis of 2008 has seen the fall of several of the mighty US investment banks, the collapse of renowned commercial banks on both sides of the Atlantic and the exhaustion of banks' capital all over the world. With it, standard views of banks, financial markets, their risks and their regulation had to be suspended, at a time when bank bailouts became unavoidable. This raises key policy questions on the way taxpayers' resources should be used: What type of capital should governments inject? How should banks' shareholders and creditors be treated? Does capital injection distort competition? Should the standard rules preventing anti-competitive behaviour be applied? How to contain future risk-taking by banks? This report assesses two related aspects of the policy response to the unprecedented financial crisis: competition policy and financial regulation. It addresses both the effectiveness of the response to the current crisis, and the lessons that can be drawn in order to reduce the likelihood of future crises. The links between competition policy and banking stability are central to assessing the crisis policy response, and in particular the effectiveness of state aid control. There have been two contrasting views of the relationship between competition and stability - one is that stability is such an urgent issue in the crisis context that it overrides competition concerns, while the alternative view is that intervention to restore financial stability will lead to massive distortions of competition in the banking sector, and so competition rules should be applied even more vigorously than usual. In contrast to these two views, this report concludes that competition policy is indeed more important than ever in times of crisis, but that the competition rules appropriate to the banking sector are different from those that apply in other sectors. This is because bailing out one bank in an episode of crisis helps its competitors, and state aid rules should reflect this characteristic. Additionally, while European competition authorities have tried, since the autumn of 2008, to strike the appropriate balance between the insistence on competition concerns and the need for urgent action to respond to the financial crisis, the time has now come for a thorough competitive assessment of the banking sector following the recent bailouts. The fact that aid to individual banks has sector-wide competition implications means that a competition assessment conducted on a case-by-case basis is not sufficient. The report also makes a series of recommendations about regulatory reform, with regard to both financial stability and competition implications. Critically, the report calls for a strengthening of competences at the European level, beyond coordination mechanisms

A Greedy Agent-Based Resource Allocation in the Smart Electricity Markets

Part 5: Agents (AGE)International audienceThe smart grid makes use of two-way streams of electricity and information to constitute an automated and distributed energy delivery network. Coming up with multi-agent systems for resource allocation, chiefly comprises the design of local capabilities of single agents, and therefore, the interaction and decision-making mechanisms that make them create the best or at least an acceptable power allocation. Due to the several issues in providing sustainable and affordable power energy, researchers try to think about creating a decentralized mechanism to be able to manage the entire transactions in retail electricity markets. As a result, this electricity infrastructure is predicted to develop into a market of markets, during which all the trading agents influence on each other and have role in toward an equilibrium one. In these markets, we are interested to minimize the buyers’ purchasing cost. Motivating this issue, we model the demand response problem in an evolutionary optimization framework and propose an evolutionary algorithm for handling the decentralized market-based resource allocation problem