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Bailing in Banks: costs and benefits


  • Sergio Rubens Stancato de Souza
  • Thiago Christiano Silva Carlos Eduardo de Almeida
  • Carlos Eduardo de Almeida


We investigate the effectiveness of bail-in mechanisms in mitigating systemic risk and welfare costs to society during resolution processes. To perform this study, we define a network model of mutually exposed banks and use it to simulate the effects of shocks to these banks using granular data of the Brazilian banking system, its interbank exposures and credit register operations. In the simulations, we compare the outcomes of these initial shocks after resolution processes with and without bail-ins. The simulations show that by avoiding the liquidation of banks and the resulting interruption in their credit provision, bail-ins would be effective in preventing the amplification of losses imposed on the real sector. Analyzing the effects that the liquidation of Brazilian Domestic Systemically Important Banks (D-SIBs) would cause to credit provision to economic sectors, we find bailing in these banks would produce a relevant decrease in credit crunches. However, in our sample, only a few banks could benefit from bail-ins due to insufficiency of bail-inable instruments. To tackle this issue, we carry out a study based on counterfactual simulations to assess if and how setting requirements for bail-inable instruments would affect the likelihood of a successful bail-in. We find the number of small and medium banks that could benefit from a bail-in would grow substantially for small increases in these requirements.

Suggested Citation

  • Sergio Rubens Stancato de Souza & Thiago Christiano Silva Carlos Eduardo de Almeida & Carlos Eduardo de Almeida, 2019. "Bailing in Banks: costs and benefits," Working Papers Series 504, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:504

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    References listed on IDEAS

    1. Poledna, Sebastian & Molina-Borboa, José Luis & Martínez-Jaramillo, Serafín & van der Leij, Marco & Thurner, Stefan, 2015. "The multi-layer network nature of systemic risk and its implications for the costs of financial crises," Journal of Financial Stability, Elsevier, vol. 20(C), pages 70-81.
    2. Silva, Thiago Christiano & Souza, Sergio Rubens Stancato & Tabak, Benjamin Miranda, 2017. "Monitoring vulnerability and impact diffusion in financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 109-135.
    3. Martynova, Natalya & Perotti, Enrico, 2018. "Convertible bonds and bank risk-taking," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 61-80.
    4. Fabian Valencia & Luc Laeven, 2012. "Systemic Banking Crises Database; An Update," IMF Working Papers 12/163, International Monetary Fund.
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    6. in ’t Veld, Daan & van Lelyveld, Iman, 2014. "Finding the core: Network structure in interbank markets," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 27-40.
    7. Silva, Thiago Christiano & de Souza, Sergio Rubens Stancato & Tabak, Benjamin Miranda, 2016. "Network structure analysis of the Brazilian interbank market," Emerging Markets Review, Elsevier, vol. 26(C), pages 130-152.
    8. Martinez-Jaramillo, Serafin & Alexandrova-Kabadjova, Biliana & Bravo-Benitez, Bernardo & Solórzano-Margain, Juan Pablo, 2014. "An empirical study of the Mexican banking system’s network and its implications for systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 242-265.
    9. Klimek, Peter & Poledna, Sebastian & Doyne Farmer, J. & Thurner, Stefan, 2015. "To bail-out or to bail-in? Answers from an agent-based model," Journal of Economic Dynamics and Control, Elsevier, vol. 50(C), pages 144-154.
    10. Hüser, Anne-Caroline & Hałaj, Grzegorz & Kok, Christoffer & Perales, Cristian & van der Kraaij, Anton, 2018. "The systemic implications of bail-in: A multi-layered network approach," Journal of Financial Stability, Elsevier, vol. 38(C), pages 81-97.
    11. Dirk Schoenmaker, 2017. "A macro approach to international bank resolution," Policy Contributions 21231, Bruegel.
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    14. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
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    16. Silva, Thiago Christiano & da Silva, Michel Alexandre & Tabak, Benjamin Miranda, 2017. "Systemic risk in financial systems: A feedback approach," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 97-120.
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