This paper endogenizes intervention in financial crises as the strategic negotiation between a regulator and creditors of distressed banks. Incentives for banks to contribute to a voluntary bail-in arise from their exposure to credit and price-mediated contagion. In equilibrium, a bail-in is...

Financial institutions form multi-layer networks of contracts among each other and exposures to common assets. As a result, the default probability of one institution depends on the default probability of all the other institutions in the network. Here, we show how small errors on the knowledge...