If fail, fail less: Banks’ decision on systematic vs idiosyncratic risk by Una Savić Comments by K. Žigić

Subject and Main Findings The effects of a particular regulatory channel on the banks’ choice between systematic and idiosyncratic risk. The regulator prefers to bail out the banks that have failed less. The ex post optimal ”fail less” bailout policy Incentives for banks to invest in more efficient projects The reduction of the banks’ ex ante herding incentives

Comments (1) The author tackles very timely problem. It could provide a standard way to approach such problems, including number of mathematical formulations and statements. The “technical" part of the paper is well done, well formulated Various robustness checks are provided.

Comments (2) Similar models use to be written down as an extension of some existing papers. Better motivation and justification needed Not much references to the existing literature; just a statements like "This describes a more realistic setup", which is not enough.

Comments (3) There is usually a certain degree of correlation between projects. It is unrealistic to have only perfect correlation or no correlation at all. What about the banks which were successful in project realization taking over the banks that failed? In addition, the regulator may force the bank to split

Comments (4) This makes the cost to society a bit different The regulatory environment differs substantially by countries This could be discussed in the last part of the paper when talking about the model real- world application. What about the size of the bank? (Citi and unknown local bank will have different treatment by regulator)

7 LOSS IN EQUITY OF THE LARGEST US BANKS AND GSE IN THE PERIOD JUNE 2007-DECEMBER 2008 Financial institutionWritte-offs and credit losses (billions of USD) Return on equity (June December 2008) Fannie Mae % Citigroup Freddie Mac Wachovia Bank of America AIG JPMorgan Merrill Lynch Wells Fargo Washington Mutual National City Morgan Stanley Source: Viral V. Acharya, Nirupama Kulkarni, and Matthew Richardson „Capital, Contingent Capital, and Liquidity Requirements“, In: Viral V. Acharya, Thomas F. Cooley, Matthew Richardson, Ingo Walter (2011) Regulating Wall Street, John Wiley & Sons, Inc, New Jersey, p. 147.

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