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Contingent Capital with Stock Price Triggers in Interbank Networks | | Anne G. Balter
; Nikolaus Schweizer
; Juan C. Vera
; | | Date: |
12 Nov 2020 | | Abstract: | This paper studies existence and uniqueness of equilibrium prices in a model
of the banking sector in which banks trade contingent convertible bonds with
stock price triggers among each other. This type of financial product was
proposed as an instrument for stabilizing the global banking system after the
financial crisis. Yet it was recognized early on that these products may create
circularity problems in the definition of stock prices - even in the absence of
trade. We find that if conversion thresholds are such that bond holders are
indifferent about marginal conversions, there exists a unique equilibrium
irrespective of the network structure. When thresholds are lower, existence of
equilibrium breaks down while higher thresholds may lead to multiplicity of
equilibria. Moreover, there are complex network effects. One bank’s conversion
may trigger further conversions - or prevent them, depending on the
constellations of asset values and conversion triggers. | | Source: | arXiv, 2011.06474 | | Services: | Forum | Review | PDF | Favorites | |
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