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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)
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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. 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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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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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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