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Why did sponsor banks rescue their SIVs?

Author

Listed:
  • Anatoli Segura

    (Bank of Italy)

Abstract

At the beginning of the recent financial crisis, sponsoring banks rescued their structured investment vehicles (SIVs) despite having no 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. A 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 sizeable 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, 2017. "Why did sponsor banks rescue their SIVs?," Temi di discussione (Economic working papers) 1100, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1100_17
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2017/2017-1100/en_tema_1100.pdf
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    References listed on IDEAS

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    Cited by:

    1. Segura, Anatoli & Zeng, Jing, 2020. "Off-balance sheet funding, voluntary support and investment efficiency," Journal of Financial Economics, Elsevier, vol. 137(1), pages 90-107.
    2. König, Philipp J. & Pothier, David, 2018. "Safe but fragile: Information acquisition, sponsor support and shadow bank runs," Discussion Papers 15/2018, Deutsche Bundesbank.
    3. 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.
    4. Gyoengyi Loranth & Anatoli Segura & Jing Zeng, 2022. "Voluntary support and ring-fencing in cross-border banks," Temi di discussione (Economic working papers) 1373, Bank of Italy, Economic Research and International Relations Area.
    5. Concetta Rondinelli & Roberta Zizza, 2020. "Spend today or spend tomorrow? The role of inflation expectations in consumer behaviour," Temi di discussione (Economic working papers) 1276, Bank of Italy, Economic Research and International Relations Area.
    6. Giorgio Nuzzo, 2017. "A critical review of the statistics on the size and riskiness of the securitization market: evidence from Italy and other euro-area countries," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Data needs and Statistics compilation for macroprudential analysis, volume 46, Bank for International Settlements.

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    More about this item

    Keywords

    reputation risk; rescues; mispricing; implicit support; shadow banking system;
    All these keywords.

    JEL classification:

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

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