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

1
Department of Economics and Management, University of Pavia, 27100 Pavia, Italy
2
European Central Bank, 60640 Frankfurt am Main, Germany
*
Author to whom correspondence should be addressed.
Received: 28 November 2018 / Revised: 22 December 2018 / Accepted: 27 December 2018 / Published: 5 January 2019
(This article belongs to the Special Issue Model Risk in Finance)
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. View Full-Text
Keywords: bail-in; bank resolution; Corporate Default Swap (CDS) spreads; financial networks; systemic risk bail-in; bank resolution; Corporate Default Swap (CDS) spreads; financial networks; systemic risk
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Giudici, P.; Parisi, L. Bail-In or Bail-Out? Correlation Networks to Measure the Systemic Implications of Bank Resolution. Risks 2019, 7, 3.

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