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Why did Sponsor Banks Rescue their SIVs? A Signaling Model of Rescues

Author

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  • Anatoli Segura

    () (CEMFI, Centro de Estudios Monetarios y Financieros)

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. The rescue is interpreted as a good signal and reduces the refinancing 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.

Suggested Citation

  • Anatoli Segura, 2014. "Why did Sponsor Banks Rescue their SIVs? A Signaling Model of Rescues," Working Papers wp2014_1402, CEMFI.
  • Handle: RePEc:cmf:wpaper:wp2014_1402
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    File URL: https://www.cemfi.es/ftp/wp/1402.pdf
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    References listed on IDEAS

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    1. Carlos O. Arteta & Mark S. Carey & Ricardo Correa & Jason Kotter, 2008. "Which banks sponsored ABCP vehicles and why?," Proceedings 1072, Federal Reserve Bank of Chicago.
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    Cited by:

    1. König, Philipp J. & Pothier, David, 2018. "Safe but fragile: Information acquisition, sponsor support and shadow bank runs," Discussion Papers 15/2018, Deutsche Bundesbank.
    2. repec:eee:jfinec:v:131:y:2019:i:3:p:715-735 is not listed on IDEAS
    3. Giovanna Nicodano & Luca Regis, 2014. "Complex organizations, tax policy and financial stability," Carlo Alberto Notebooks 359, Collegio Carlo Alberto, revised 2015.
    4. repec:oup:revfin:v:22:y:2018:i:4:p:1335-1373. is not listed on IDEAS
    5. Giovanna Nicodano & Luca Regis, 2015. "Ownership, Taxes and Default," Working Papers 7/2015, IMT Institute for Advanced Studies Lucca, revised Jul 2015.
    6. Steven Ongena & Günseli Tümer–Alkan & Natalja von Westernhagen, 2018. "Do Exposures to Sagging Real Estate, Subprime, or Conduits Abroad Lead to Contraction and Flight to Quality in Bank Lending at Home?," Review of Finance, European Finance Association, vol. 22(4), pages 1335-1373.
    7. Luck, Stephan & Schempp, Paul, 2014. "Banks, shadow banking, and fragility," Working Paper Series 1726, European Central Bank.
    8. repec:bis:bisifc:46-23 is not listed on IDEAS
    9. Lucyna Gornicka, 2014. "Shadow Banking and Traditional Bank Lending: The Role of Implicit Guarantees," Tinbergen Institute Discussion Papers 14-035/VI/DSF74, Tinbergen Institute, revised 16 Jun 2014.
    10. Nicodano, Giovanna & Regis, Luca, 2019. "A trade-off theory of ownership and capital structure," Journal of Financial Economics, Elsevier, vol. 131(3), pages 715-735.
    11. repec:pal:jbkreg:v:18:y:2017:i:2:d:10.1057_s41261-016-0034-8 is not listed on IDEAS

    More about this item

    Keywords

    Reputation risk; rescues; mispricing; implicit support; shadow banking system.;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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