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Bail-In or Bail-Out? Correlation Networks to Measure the Systemic Implications of Bank Resolution

Paolo Giudici () and Laura Parisi ()

Risks, 2019, vol. 7, issue 1, 1-25

Abstract: We propose a statistical measure, based on correlation networks, to evaluate the systemic risk that could arise from the resolution of a failing or likely-to-fail financial institution, under three alternative scenarios: liquidation, private recapitalization, or bail-in. The measure enhances the observed CDS spreads with a risk premium that derives from contagion effects across financial institutions. The empirical findings reveal that the recapitalization of a distressed bank performed by the other banks in the system and the bail-in resolution minimize the potential losses for the banking sector with respect to the liquidation scenario, thus posing limited systemic risks. A closer comparison between the private intervention recapitalization and the bail-in tool shows that the latter slightly reduces contagion effects with respect to the private intervention scenario.

Keywords: bail-in; bank resolution; Corporate Default Swap (CDS) spreads; financial networks; systemic risk (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 M2 M4 K2 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:gam:jrisks:v:7:y:2019:i:1:p:3-:d:195087