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Navigating Banking Resilience: Bail-ins & Bailouts in the Czech Banking Sector

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  • Josef Sveda

Abstract

How much capital is truly enough to shield banks from default? Understanding this threshold is critical for designing regulatory frameworks that balance financial stability with economic growth. This paper develops a reverse stress testing framework to assess the resilience of the banking sector under extreme credit shocks. It focuses on the conditions under which banks facing distress transition from bail-ins to government bailouts, using the Czech banking sector as a case study. Our findings indicate that a capital ratio of 23.5% is sufficient to absorb losses comparable to the most severe stress experienced during the Global Financial Crisis (GFC), preventing the need for public intervention. Moreover, we show that regulatory capital buffers are well-calibrated, covering losses up to the second-largest stress event observed in the GFC. Unlike many reverse stress testing approaches, our model explicitly accounts for the dynamic effects of risk-weighted asset (RWA) adjustments, revealing that static RWA assumptions may overestimate capital resilience. These results provide critical insights for policymakers, suggesting that capital adequacy requirements remain well-calibrated but warrant further scrutiny regarding how risk weights evolve under stress conditions.

Suggested Citation

  • Josef Sveda, 2025. "Navigating Banking Resilience: Bail-ins & Bailouts in the Czech Banking Sector," Working Papers 2025/5, Czech National Bank, Research and Statistics Department.
    • Handle: RePEc:cnb:wpaper:2025/5
    as

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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2025_05.pdf
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    References listed on IDEAS

    as
    1. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    2. Tijmen Daniëls & Patty Duijm & Franka Liedorp & Dimitris Mokas, 2017. "A top-down stress testing framework for the Dutch banking sector," DNB Occasional Studies 1503, Netherlands Central Bank, Research Department.
    3. Ambrocio, Gene & Hasan, Iftekhar & Jokivuolle, Esa & Ristolainen, Kim, 2020. "Are bank capital requirements optimally set? Evidence from researchers’ views," Journal of Financial Stability, Elsevier, vol. 50(C).
    4. Martin Birn & Olivier de Bandt & Simon Firestone & Matías Gutiérrez Girault & Diana Hancock & Tord Krogh & Hitoshi Mio & Donald P. Morgan & Ajay Palvia & Valerio Scalone & Michael Straughan & Arzu Ulu, 2020. "The Costs and Benefits of Bank Capital—A Review of the Literature," JRFM, MDPI, vol. 13(4), pages 1-25, April.
    5. Farkas, Walter & Fringuellotti, Fulvia & Tunaru, Radu, 2020. "A cost-benefit analysis of capital requirements adjusted for model risk," Journal of Corporate Finance, Elsevier, vol. 65(C).
    6. Mr. Marco Gross & Mr. Dimitrios Laliotis & Mindaugas Leika & Pavel Lukyantsau, 2020. "Expected Credit Loss Modeling from a Top-Down Stress Testing Perspective," IMF Working Papers 2020/111, International Monetary Fund.
    7. Ambrocio, Gene & Hasan, Iftekhar & Jokivuolle, Esa & Ristolainen, Kim, 2020. "Are bank capital requirements optimally set? Evidence from researchers’ views," Journal of Financial Stability, Elsevier, vol. 50(C).
    8. Klomp, Jeroen & Haan, Jakob de, 2012. "Banking risk and regulation: Does one size fit all?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3197-3212.
    9. repec:zbw:bofrdp:2020_010 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bail-in; bailout; banking crisis; capital adequacy; capital ratio; resilience; reverse stress test;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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