‘Sandpile’ model makes case for supervisory intervention
IMF paper finds that arranging sales of failing banks is best policy, despite some side effects
A model that treats bank losses as accumulating grains of sand shows that the best policy for supervisors is to intervene in the case of a bank collapse and merge the failed institution with a stronger competitor.
Francesco Luna and Luisa Zanforlin, economists at the International Monetary Fund, present the results in a working paper, published on February 14.
The authors note that supervisory interventions have two countervailing effects: they promote financial stability by encouraging banks to
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