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The systemic implications of bail-in: a multi-layered network approach

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  • Kok, Christoffer
  • Hałaj, Grzegorz
  • Hüser, Anne-Caroline
  • Perales, Cristian
  • van der Kraaij, Anton

Abstract

We present a tractable framework to assess the systemic implications of bail-in. To this end, we construct a multi-layered network model where each layer represents the securities cross holdings of a specific seniority among the largest euro area banking groups. On this basis, the bail-in of a bank can be simulated to identify the direct contagion risk to the other banks in the network. We find that there is no direct contagion to creditor banks. Spill-overs also tend to be small due to low levels of securities cross-holdings in the interbank network. We also quantify the impact of a bail-in on the different liability holders. In the baseline scenario, shareholders and subordinated creditors are always affected by the bail-in, senior unsecured creditors in 75% of the cases. Finally, we compute the effect of the bail-in on the network topology in each layer. We find that a bail-in significantly reshapes interbank linkages within specific seniority layers. JEL Classification: G01, G18, G21, C63

Suggested Citation

  • Kok, Christoffer & Hałaj, Grzegorz & Hüser, Anne-Caroline & Perales, Cristian & van der Kraaij, Anton, 2017. "The systemic implications of bail-in: a multi-layered network approach," Working Paper Series 2010, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172010
    Note: 508948
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    More about this item

    Keywords

    bail-in; financial networks; policy simulation; resolution regimes; systemic risk;
    All these keywords.

    JEL classification:

    • 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
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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