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3949. Stabilizing financial networks via mergers and acquisitions
Invited abstract in session WC-2: Portfolio Optimization: Models and Methods, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.
Wednesday, 12:30-14:00Room: Glassalen (building: 101)
Authors (first author is the speaker)
| 1. | Markku Kallio
|
| Aalto University School of Business | |
| 2. | Aien khabazian
|
| Department of Industrial Engineering, University of Houston |
Abstract
A bi-level model is proposed to explore efficient policies for supporting negotiations on financial crisis resolution. In a principal-agent framework, this model minimizes a welfare loss function of a central authority (social planner, SP) by simultaneous choice of subsidy levels and potential pairs of banks to merge. The SP’s choice of mergers needs to be incentive compatible with autonomous choices of banks and the evaluation of the financial network must obey standard accounting principles. Incentive compatibility is enforced by two options of conditions based on stable matching or competitive bidding. For the evaluation of a financial network, we employ an extended Eisenberg-Noe clearing payment equilibrium by considering bankruptcy costs and seniority levels of liabilities. Additionally, liabilities are not cleared among solvent banks and corporate bonds may be used for clearing payments. The bi-level model states conditions for the clearing equilibrium. For demonstration we use major European banks and a scenario which is linked to the adverse economic scenario used in 2016 EU-wide stress testing.
Keywords
- Finance and Banking
- Risk Analysis and Management
Status: accepted
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