FRIC/Finance Seminar with Anatoli Segura, CEMFI

FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Anatoli Segura, CEMFI.

Anatoli Segura will present: 

Why did sponsor banks rescue their SIVs? A reputational model of rescues

Abstract:

At the beginning of the past …financial crisis sponsoring banks rescued their structured investment vehicles (SIVs) despite of lack of contractual obligation to do so. I show that this outcome may arise as the equilibrium of a signaling game between banks and their debt investors when a negative shock affects the correlated asset returns of a fraction of banks and their sponsored vehicles. In equilibrium, the rescue is interpreted as a good signal and reduces the re…nancing costs of the sponsoring bank. If banks'’ leverage is high or the negative shock is sizable enough, the equilibrium is a pooling one in which all banks rescue. When the aggregate financial sector is close to insolvency, banks' ’expected net worth would increase if rescues were banned. The model can be extended to discuss the circumstances in which all banks collapse after rescuing their vehicles.