thesis
Essays on financial networks, systemic risk and policy
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Abstract
This essay consists of three chapters.
Chapter one extends Allen and Gale’s (2000) model to a
core-periphery network structure. We identify that the financial
contagion in core-periphery structure is different to Allen and Gale
(2000) in two aspects. Firstly, the shocks to the periphery bank and
to the core bank have different contagion processes. Secondly,
contagion not only depends on the amount of claims a bank has on a
failed bank, but also on the number of links the failed neighbour has.
Chapter two studies the policy effect on financial network
formation when the government has time-inconsistency problem on
bailing out systemically important bank. We show that if interbank
deposits are guaranteed, the equilibrium network structure is
different from the one under market discipline. We show that under
market discipline individual banks can collectively increase the
component size using interbank intermediation in order to increases
the severity of systemic risk and hence trigger the bailout. If
interbank intermediation is costly the equilibrium network has
core-periphery structure.
Chapter three follows Acharya and Yorulmazer’s (2007) study of
the "too many to fail" problem in a two-bank model. They argue that
in order to reduce the social losses, the financial regulator finds it ex
post optimal to bail out every troubled bank if they fail together,
because the acquisition of liquidated assets by other investors result
in a high misallocation cost. In contrast to their paper, we argue that
there is no "too many to fail" bailout, unless banking capital is costly
and market price sensitive. We argue that market price sensitive
capital can induce banks herding and high social cost