The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Financial Networks: Contagion, Commitment, and Private Sector Bailouts
Published: 11/10/2005 | DOI: 10.1111/j.1540-6261.2005.00821.x
YARON LEITNER
I develop a model of financial networks in which linkages not only spread contagion, but also induce private sector bailouts, where liquid banks bail out illiquid banks because of the threat of contagion. Introducing this bailout possibility, I show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible. However, in some cases (e.g., when liquidity is concentrated among a small group of banks), the whole network may collapse. I also characterize the optimal network size and apply the results to joint liability arrangements and payment systems.
Model Secrecy and Stress Tests
Published: 02/04/2023 | DOI: 10.1111/jofi.13207
YARON LEITNER, BASIL WILLIAMS
Should regulators reveal the models they use to stress‐test banks? In our setting, revealing leads to gaming, but secrecy can induce banks to underinvest in socially desirable assets for fear of failing the test. We show that although the regulator can solve this underinvestment problem by making the test easier, some disclosure may still be optimal (e.g., if banks have high appetite for risk or if capital shortfalls are not very costly). Cutoff rules are optimal within monotone disclosure rules, but more generally optimal disclosure is single‐peaked. We discuss policy implications and offer applications beyond stress tests.