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Systemic risk and the optimal seniority structure of banking liabilities

Author

Listed:
  • Spiros Bougheas

    (School of Economics, University of Nottingham)

  • Alan Kirman

    (Faculte de Droit et de Sciences Politiques, Aix-Marseille Université)

Abstract

The paper argues that systemic risk must be taken into account when designing optimal bankruptcy procedures in general, and priority rules in particular. Allowing for endogenous formation of links in the interbank market we show that the optimal policy depends on the distribution of shocks and the severity of fire sales.

Suggested Citation

  • Spiros Bougheas & Alan Kirman, 2016. "Systemic risk and the optimal seniority structure of banking liabilities," Gecomplexity Discussion Paper Series 201602, Action IS1104 "The EU in the new complex geography of economic systems: models, tools and policy evaluation", revised Jan 2016.
    • Handle: RePEc:cst:wpaper:201602
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    File URL: http://www.gecomplexity-cost.eu/repec/cst/wpaper/geco_dp_2_16.pdf
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    References listed on IDEAS

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    1. Pasquale Commendatore & Saime Kayam & Ingrid Kubin (ed.), 2015. "Complexity and Geographical Economics," Dynamic Modeling and Econometrics in Economics and Finance, Springer, edition 127, number 978-3-319-12805-4, June.
    2. Birchler, Urs W, 2000. "Bankruptcy Priority for Bank Deposits: A Contract Theoretic Explanation," The Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 813-840.
    3. Patrick Bolton & Martin Oehmke, 2015. "Should Derivatives Be Privileged in Bankruptcy?," Journal of Finance, American Finance Association, vol. 70(6), pages 2353-2394, December.
    4. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    5. Bolton, Patrick & Oehmke, Martin, 2015. "Should derivatives be privileged in bankruptcy?," LSE Research Online Documents on Economics 84512, London School of Economics and Political Science, LSE Library.
    6. Spiros Bougheas & Alan Kirman, 2015. "Complex Financial Networks and Systemic Risk: A Review," Dynamic Modeling and Econometrics in Economics and Finance, in: Pasquale Commendatore & Saime Kayam & Ingrid Kubin (ed.), Complexity and Geographical Economics, edition 127, pages 115-139, Springer.
    7. Spiros Bougheas & Alan Kirman, 2016. "Bank Insolvencies, Priority Claims and Systemic Risk," Lecture Notes in Economics and Mathematical Systems, in: Pasquale Commendatore & Mariano Matilla-García & Luis M. Varela & Jose S. Cánovas (ed.), Complex Networks and Dynamics, pages 195-208, Springer.
    8. Kaufman, George G., 2014. "Too big to fail in banking: What does it mean?," Journal of Financial Stability, Elsevier, vol. 13(C), pages 214-223.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Baumöhl, Eduard & Bouri, Elie & Hoang, Thi-Hong-Van & Shahzad, Syed Jawad Hussain & Výrost, Tomáš, 2020. "Increasing systemic risk during the Covid-19 pandemic: A cross-quantilogram analysis of the banking sector," EconStor Preprints 222580, ZBW - Leibniz Information Centre for Economics.
    2. Padellini, Mauro, 2021. "Balance sheet and seniority constraints on the repayment value of claims," MPRA Paper 107295, University Library of Munich, Germany.
    3. Eboli, Mario, 2025. "Systemic risk in centralised interbank networks," Journal of Financial Stability, Elsevier, vol. 81(C).
    4. Liang Liu & Hang Le & Steve Thompson, 2022. "CEO overconfidence and bank systemic risk: Evidence from U.S. bank holding companies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2977-2996, July.
    5. Altavilla, Carlo & Fernandes, Cecilia Melo & Ongena, Steven & Scopelliti, Alessandro, 2022. "Bank bond holdings and bail-in regulatory changes: evidence from euro area security registers," Working Paper Series 2758, European Central Bank.
    6. Spiros Bougheas & Alan Kirman, 2016. "Bank Insolvencies, Priority Claims and Systemic Risk," Lecture Notes in Economics and Mathematical Systems, in: Pasquale Commendatore & Mariano Matilla-García & Luis M. Varela & Jose S. Cánovas (ed.), Complex Networks and Dynamics, pages 195-208, Springer.
    7. Padellini, Mauro, 2021. "Balance sheet and seniority constraints on the repayment value of claims," MPRA Paper 107256, University Library of Munich, Germany.

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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