IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2608.18113.html

Optimal Loss Allocation in a Mean-Field Model of Systemic Risk

Author

Listed:
  • Yucheng Guo
  • Qinxin Yan

Abstract

We study a systemic-risk control problem in which a central planner allocates losses generated by bank defaults across the surviving institutions. Banks are modeled through their distances to default, evolving as absorbed Brownian motions with downward jumps induced by redistributed default losses. Unlike bailout models, the planner cannot inject external capital or reduce the aggregate loss, and the only admissible intervention is to decide how each endogenous loss is assigned among solvent banks. The objective is to maximize terminal system health, including survival mass as a leading special case and, more generally, increasing concave welfare functionals of the terminal distribution. Our main result identifies an optimal allocation rule with a simple economic interpretation: losses should be concentrated on the currently healthiest institutions. In discrete time, this rule takes the form of a cutoff or taxing-the-richest policy, which reduces banks above an endogenous threshold down to that threshold while leaving weaker banks untouched. We prove convergence of the time-discretized mean-field control problem as the allocation time step tends to zero and characterize the limiting problem as a singular mean-field control problem. The optimally controlled law is described by a reflected free-boundary formulation, in which the cutoff becomes the moving upper edge of the support, and the associated value function satisfies a Hamilton-Jacobi equation on Wasserstein space. Finally, we formulate the corresponding finite-particle control problem and show, under suitable assumptions, that the cutoff-controlled particle system converges to the continuous-time mean-field model. This provides a finite-system foundation for the optimal mean-field loss-allocation rule.

Suggested Citation

  • Yucheng Guo & Qinxin Yan, 2026. "Optimal Loss Allocation in a Mean-Field Model of Systemic Risk," Papers 2608.18113, arXiv.org.
  • Handle: RePEc:arx:papers:2608.18113
    as

    Download full text from publisher

    File URL: https://arxiv.org/pdf/2608.18113
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ben Hambly & Andreas Søjmark, 2019. "An SPDE model for systemic risk with endogenous contagion," Finance and Stochastics, Springer, vol. 23(3), pages 535-594, July.
    2. Burdzy, Krzysztof & Kang, Weining & Ramanan, Kavita, 2009. "The Skorokhod problem in a time-dependent interval," Stochastic Processes and their Applications, Elsevier, vol. 119(2), pages 428-452, February.
    3. Toshiaki Yamanaka, 2025. "Coordinated Mean-Field Control for Systemic Risk," Papers 2512.04704, arXiv.org.
    4. Feinstein, Zachary & Sojmark, Andreas, 2021. "Short communication: dynamic default contagion in heterogeneous interbank systems," LSE Research Online Documents on Economics 123789, London School of Economics and Political Science, LSE Library.
    5. Zachary Feinstein & Andreas Sojmark, 2020. "Dynamic Default Contagion in Heterogeneous Interbank Systems," Papers 2010.15254, arXiv.org, revised Jul 2021.
    6. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    7. Rama Cont & Xin Guo & Renyuan Xu, 2021. "Interbank lending with benchmark rates: Pareto optima for a class of singular control games," Mathematical Finance, Wiley Blackwell, vol. 31(4), pages 1357-1393, October.
    8. Christa Cuchiero & Christoph Reisinger & Stefan Rigger, 2024. "Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem," Annals of Operations Research, Springer, vol. 336(1), pages 1315-1349, May.
    9. Christa Cuchiero & Christoph Reisinger & Stefan Rigger, 2024. "Correction to: Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem," Annals of Operations Research, Springer, vol. 332(1), pages 1175-1175, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Toshiaki Yamanaka, 2025. "Coordinated Mean-Field Control for Systemic Risk," Papers 2512.04704, arXiv.org.
    2. Aoxin Zhang & Yingzhe Wang, 2026. "Controlled McKean--Vlasov Contagion with State-Dependent Killing," Papers 2605.24833, arXiv.org, revised Jun 2026.
    3. Feinstein, Zachary & Hałaj, Grzegorz, 2023. "Interbank asset-liability networks with fire sale management," Journal of Economic Dynamics and Control, Elsevier, vol. 155(C).
    4. Zachary Feinstein & Andreas Sojmark, 2021. "Contagious McKean-Vlasov systems with heterogeneous impact and exposure," Papers 2104.06776, arXiv.org, revised Sep 2022.
    5. Giuseppe C. Calafiore & Giulia Fracastoro & Anton V. Proskurnikov, 2022. "Clearing Payments in Dynamic Financial Networks," Papers 2201.12898, arXiv.org, revised May 2022.
    6. Rudiger Frey & Theresa Traxler, 2024. "Playing with Fire? A Mean Field Game Analysis of Fire Sales and Systemic Risk under Regulatory Capital Constraints," Papers 2406.17528, arXiv.org.
    7. Zachary Feinstein & Andreas Sojmark, 2020. "Dynamic Default Contagion in Heterogeneous Interbank Systems," Papers 2010.15254, arXiv.org, revised Jul 2021.
    8. Matteo Citterio & Marco D'Errico & Gabriele Visentin, 2024. "Conditional Forecasting of Margin Calls using Dynamic Graph Neural Networks," Papers 2410.23275, arXiv.org.
    9. Dianetti, Jodi & Ferrari, Giorgio, 2023. "Multidimensional singular control and related Skorokhod problem: Sufficient conditions for the characterization of optimal controls," Stochastic Processes and their Applications, Elsevier, vol. 162(C), pages 547-592.
    10. Mao Fabrice Djete & Gaoyue Guo & Nizar Touzi, 2023. "Mean field game of mutual holding with defaultable agents, and systemic risk," Papers 2303.07996, arXiv.org.
    11. Banerjee, Tathagata & Bernstein, Alex & Feinstein, Zachary, 2025. "Dynamic clearing and contagion in financial networks," European Journal of Operational Research, Elsevier, vol. 321(2), pages 664-675.
    12. Yucheng Guo & Qinxin Yan, 2025. "Particle Systems with Local Interactions via Hitting Times and Cascades on Graphs," Papers 2505.18448, arXiv.org, revised Mar 2026.
    13. Mao Fabrice Djete & Gaoyue Guo & Nizar Touzi, 2023. "Mean field game of mutual holding with defaultable agents, and systemic risk," Post-Print hal-04565544, HAL.
    14. Hamed Amini & Zhongyuan Cao & Andreea Minca & Agn`es Sulem, 2023. "Ruin Probabilities for Risk Processes in Stochastic Networks," Papers 2302.06668, arXiv.org.
    15. Feinstein, Zachary & Sojmark, Andreas, 2021. "Short communication: dynamic default contagion in heterogeneous interbank systems," LSE Research Online Documents on Economics 123789, London School of Economics and Political Science, LSE Library.
    16. Pengbin Feng, 2026. "Low-rank and graphon limits for dynamic threshold distress contagion in heterogeneous financial networks," Papers 2608.04529, arXiv.org, revised Oct 2026.
    17. Zachary Feinstein & Andreas Sojmark, 2022. "Endogenous distress contagion in a dynamic interbank model: how possible future losses may spell doom today," Papers 2211.15431, arXiv.org, revised Feb 2025.
    18. Claus Puhr & Reinhardt Seliger & Michael Sigmund, 2012. "Contagiousness and Vulnerability in the Austrian Interbank Market," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 24, pages 62-78.
    19. Nils Detering & Thilo Meyer-Brandis & Konstantinos Panagiotou & Daniel Ritter, 2018. "Financial Contagion in a Generalized Stochastic Block Model," Papers 1803.08169, arXiv.org, revised Dec 2019.
    20. Ketelaars, Martijn W. & Borm, Peter & Herings, P. Jean-Jacques, 2026. "Duality in financial networks," Games and Economic Behavior, Elsevier, vol. 157(C), pages 88-108.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2608.18113. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: https://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.