Taming SIFIs

We model a Systemically Important Financial Institution (SIFI) that is too big(or too interconnected) to fail. Without credible regulation and strong supervision,the shareholders of this institution might deliberately let its managers take excessiverisk. We propose a solution to this problem, showing how insurance againstsystemic shocks can be provided without generating moral hazard. The solutioninvolves levying a systemic tax needed to cover the costs of future crises and moreimportantly establishing a Systemic Risk Authority endowed with special resolutionpowers, including the control of bankers' compensation packages during crisisperiods.

Fair pricing of deposit insurance. Is it possible? Yes. Is it desirable? No

This note elaborates on a recent article by Chan, Greenbaum and Thakor(1992) who contend that fairly priced deposit insurance is incompatiblewithfree competition in the banking sector, in the presence of adverseselection.We show here that at soon as one introduces a real economic motivationfromprivate banks to manage the deposits from the public, then fairly priceddeposit insurance becomes possible. However, we also show that sucha fairlypriced insurance is never desirable, precisely because of adverseselection.We compute the characteristics of the optimal premium schedule, whichtradesoff between the cost of adverse selection and the cost of ``unfaircompetition ''.

Systemic risk, interbank relations and liquidity provision by the Central Bank

We model systemic risk in an interbank market. Banks face liquidityneeds as consumers are uncertain about where they need to consume. Interbank credit lines allow to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market exposes the system to a coordination failure(gridlock equilibrium) even if all banks are solvent. When one bankis insolvent, the stability of the banking system is affected in various ways depending on the patterns of payments across locations. We investigate the ability of the banking industry to withstand the insolvency of one bank and whether the closure ofone bank generates a chain reaction on the rest of the system. Weanalyze the coordinating role of the Central Bank in preventing payments systemic repercussions and we examine the justification ofthe Too-big-to-fail-policy.

The lender of last resort: A 21st Century approach

The object of this paper is to analyze rigorously the role of a Lender ofLast Resort by providing a framework where the distinction betweeninsolvency and illiquidity is not clearly cut. Determining the optimalLender of Last Resort policy requires a careful modeling of the structureof the interbank market and of the closure policy. In our set up, theresults depend upon the existence of moral hazard. If the main source ofmoral hazard is the banks lack of incentives to screen loans, then theLender of Last Resort may have to intervene to improve the e¢ciency of anunsecured interbank market; if instead, the main source of moral hazard isloans monitoring, then the interbank market should be secured and theLender of Last Resort should never intervene.

The pricing of academic journals: A two-sided market perspective

More and more academic journals adopt an open-access policy, by which articlesare accessible free of charge, while publication costs are recovered through authorfees. We study the consequences of this open access policy on a journal s qualitystandard. If the journal s objective was to maximize social welfare, open accesswould be optimal as long as the positive externalities generated by its diffusionexceed the marginal cost of distribution. However, we show that if an open accessjournal has a different objective (such as maximizing readers payoffs, the impactof the journal or its profit), it tends to choose a quality standard below the sociallyefficient level.