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Kartik Anand


I am an economist in the Research Centre at the Deutsche Bundesbank. I obtained my PhD in Applied Mathematics from the University of London and my BA in Mathematics from Johns Hopkins University.

Research interests:

  • financial intermediation

  • banking regulation

  • political economy

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Working Papers

Cybersecurity and financial stability

R&R Journal of Financial Economics

Cyberattacks can trigger bank runs when vulnerabilities in IT systems are exploited. A trade-off between protection against cyberattacks and resilience in the event of attack shapes a bank’s private incentives to invest in cybersecurity. Relative to the social optimum, there can be under- or over-investment in cybersecurity depending on the capability of the attacker and the nature of bank fragility. We clarify the circumstances where regulatory measures such as cyber-stress testing, red-teaming, and negligence rules are appropriate. The analysis also considers Knightian uncertainty by investors, a lender of last resort, technology vendors, and multiple banks using common IT systems.

Co-authors: Chanelle Duley and Prasanna Gai

We develop a model of bank risk-taking with strategic sovereign default. Domestic banks invest in real projects and purchase government bonds. While an increase in bond purchases crowds out profitable investments, it improves the government’s incentives to repay and therefore lowers its borrowing costs. Banks’ portfolio choices are shaped by the level of government debt, which, in turn, influences the correlation between endogenous bank and sovereign de- fault. Since banks fail to account for how their bond purchases influence the government’s default incentives, this leads to socially inefficient levels of bond holdings. In particular, when the stock of government debt is high, banks hold too few bonds as they fails to internalize the social value they impart on the government’s incentives to repay. Introducing a large exposure limit in such a situation would be detrimental to welfare.

Co-authors: Jochen Mankart

Regulation of stablecoins: Some simple analytics

Co-authors: Chanelle Duley, Prasanna Gai and Laura Zhao

Bank Fragility, Lender of Last Resort, and Liquidity Regulation

Co-author: Toni Ahnert and Guillem Ordõnez-Calafi

Work in Progress

Selected Publications

Leaping into the dark: A model of policy gambles

Journal of Comparative Economics, 2023

We examine why rational voters support risky “policy gambles” over a safe status quo, even when such policies are detrimental to welfare. In a model of electoral competition, investors finance domestic projects in exchange for a stake in future output, while voters receive the remaining output. Government policy influences the riskiness of projects’ output. However, when investors invest, the incumbent cannot pre-commit to retain the status quo policy into the future. Instead, future policy is determined subsequently in an election where voters can increase their expected output by voting for policy gambles. Our analysis highlights how investors’ self-fulfilling beliefs interact with the distribution of output in abandoning the status quo. We argue that institutions that foster political consensus can eliminate the gamble equilibrium and raise welfare.

Co-authors: Prasanna Gai and Philipp König

Journal of Money, Credit and Banking, 2023

How do real interest rates affect financial fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. A bank’s optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank creditors. Changes in the interest rate affect the price and amount of borrowing, both of which influence bank fragility in opposite directions. The marginal impact of changes to the interest rate on bank fragility depends on the level of the interest rate. Finally, we derive testable implications that may guide future empirical work.

Co-authors: Toni Ahnert and Philipp König

Asset encumbrance, bank funding and fragility

Review of Financial Studies, 2019

We model asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank’s privately optimal encumbrance choice balances the benefit of expanding profitable, yet illiquid, investment funded by cheap long-term senior secured debt, against the cost of greater fragility from runs on unsecured debt. We derive testable implications about encumbrance ratios. The introduction of deposit insurance or wholesale funding guarantees induces excessive encumbrance and fragility. Limits on asset encumbrance or Pigovian taxes eliminate such risk-shifting incentives. Our results shed light on prudential policies currently being pursued in several jurisdictions.

Co-authors: Toni Ahnert, Prasanna Gai and James Chapman

Oxford Economic Papers, 2019

We offer an analytical framework for studying ‘pre-emptive’ debt exchanges. Countries can tailor a sovereign bankruptcy framework by choosing provisions (or ‘haircuts’) ex ante, but must contend with the market discipline of holdout litigation ex post. Secondary markets play a role in shaping the holdout costs facing the sovereign, and our results suggest that it is optimal to prioritize the rights of holdout creditors during litigation so that they are always paid in full. We clarify how macroeconomic and legal factors influence the choice of haircut. Our model contributes to the debate on sovereign debt restructuring by formalizing Bolton and Skeel’s notion of a ‘Designer SDRM’.

Co-authors: Prasanna Gai

Journal of Financial Stability, 2018

Capturing financial network linkages and contagion in stress test models are important goals for banking supervisors and central banks responsible for micro- and macroprudential policy. However, granular data on financial networks is often lacking, and instead the networks must be reconstructed from partial data. In this paper, we conduct a horse race of network reconstruction methods using network data obtained from 25 different markets spanning 13 jurisdictions. Our contribution is two-fold: first, we collate and analyze data on a wide range of financial networks. And second, we rank the methods in terms of their ability to reconstruct the structures of links and exposures in networks.

Co-authors: Iman van Lelyveld, Adam Banai, Soeren Friedrich, Rodney Garratt, Gregorz Halaj, Bradley Howell, Ib Hansen, Serafin Martinez Jaramillo, Hwayun Lee, Jose Luis Molina-Borboa, Stefano Nobili, Sriram Rajan, Dilyara Salakhova, Thiago Christiano Silva, Laura Silvestri and Sergio Rubens Stancatode Souza

Filling in the blanks: network structure and interbank contagion

Quantitative Finance, 2015

The network pattern of financial linkages is important in many areas of banking and finance. Yet, bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding networks with minimum density. When used in a stress-testing context, the minimum-density solution overestimates contagion, whereas maximum entropy underestimates it. Using the two benchmarks side-by-side defines a useful range that bounds the cost of contagion in the true interbank network when counterparty exposures are unknown.

Co-authors: Ben Craig and Goetz von Peter

Guarantees, transparency and the interdependency between sovereign and bank default risk

Journal of Banking and Finance, 2014

Bank debt guarantees have traditionally been viewed as costless measures to prevent bank runs. However, as recent experiences in some European countries have demonstrated, guarantees may link the coordination problems of bank and sovereign creditors and induce a functional interdependence between the likelihoods of a government default and bank illiquidity. Employing a global-game approach, we model this link, showing the existence and uniqueness of the joint equilibrium and derive its comparative statics properties. In equilibrium, the guarantee reduces the probability of a bank run, while it increases the probability of a sovereign default. The latter erodes the guarantee’s credibility and thus its effectiveness ex ante. By setting the guarantee optimally, the government balances these two effects in order to minimize expected costs of crises. Our results show that the optimal guarantee has clear-cut welfare gains which are enhanced through policies that promote greater balance sheet transparency.

Co-authors: Philipp König and Frank Heinemann

A network model of financial system resilience

Journal of Economic Behavior and Organization, 2013

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a stylized financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents – domestic banks, overseas banks, and firms. Calibrating the model to advanced country banking sector data, this preliminarily model generates broadly sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyse how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.

Co-authors: Prasanna Gai, Sujit Kapadia, Matthew Wilison and Simon Brennan

Rollover risk, network structure and systemic financial crises

Journal of Economic Dynamics and Control, 2012

The breakdown of short-term funding markets was a key feature of the global financial crisis of 2007/2008. Drawing on ideas from global games and network growth, we show how network topology interacts with the funding structure of financial institutions to determine system-wide crises. Bad news about a financial institution can lead others to lose confidence in it and their withdrawals, in turn, trigger problems across the interbank network. Once broken, credit relations take a long time to re-establish as a result of common knowledge of the equilibrium. Our findings shed light on public policy responses during and after the crisis.

Co-authors: Prasanna Gai and Matteo Marsili

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