IDEAS home Printed from https://ideas.repec.org/p/fip/fedrwp/18-06.html
   My bibliography  Save this paper

On the Measurement of Large Financial Firm Resolvability

Author

Listed:
  • Jackson Evert
  • Arantxa Jarque
  • John R. Walter

Abstract

We say that a large financial institution is \"resolvable\" if policymakers would allow it to go through unassisted bankruptcy in the event of failure. The choice between bankruptcy or bailout trades off the higher loss imposed on the economy in a potentially disruptive resolution against the incentive for excessive risk-taking created by an assisted resolution or a bailout. The resolution plans (\"living wills\") of large financial institutions contain information needed to evaluate this trade-off. In this paper, we propose a tool to complement the living will review process: an impact score that compares expected losses in the economy stemming from a resolution in bankruptcy with those expected under an assisted resolution or a bailout, based solely on objective characteristics of a bank holding company. We provide a framework that allows us to discuss the data needed and the concepts that underlie the construction of such a score. Importantly, the same firm characteristics may be ascribed different impacts under different resolution methods or crisis scenarios, and these impacts can depend on policymakers' assessments. We say that a firm's structure is acceptable if its impact score under bankruptcy is lower than that of any other resolution method. We study the current score used to designate firms as GSIBs and propose a modified version that we view as a starting point for an impact score.

Suggested Citation

  • Jackson Evert & Arantxa Jarque & John R. Walter, 2018. "On the Measurement of Large Financial Firm Resolvability," Working Paper 18-6, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:18-06
    as

    Download full text from publisher

    File URL: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/working_papers/2018/pdf/wp18-06.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
    2. Lacker, Jeffrey M., 2004. "Payment system disruptions and the federal reserve following September 11, 2001," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 935-965, July.
    3. Daniel Covitz & Nellie Liang & Gustavo A. Suarez, 2013. "The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market," Journal of Finance, American Finance Association, vol. 68(3), pages 815-848, June.
    4. Huberto M. Ennis & David A. Price, 2015. "Discount Window Lending: Policy Trade-offs and the 1985 BoNY Computer Failure," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue May.
    5. Phoebe White & Tanju Yorulmazer, 2014. "Bank resolution concepts, trade-offs, and changes in practices," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 153-173.
    6. Kartik B. Athreya & Arantxa Jarque, 2015. "Understanding Living Wills," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 193-223.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. John R. Walter, 2019. "US Bank Capital Regulation: History and Changes Since the Financial Crisis," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 1-40.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zafer Kanık, 2017. "Rescuing the Financial System: Capabilities, Incentives, and Optimal Interbank Networks," Working Papers 17-17, NET Institute.
    2. Jose Fique, 2016. "A Microfounded Design of Interconnectedness-Based Macroprudential Policy," Staff Working Papers 16-6, Bank of Canada.
    3. Nan Chen & Xin Liu & David D. Yao, 2016. "An Optimization View of Financial Systemic Risk Modeling: Network Effect and Market Liquidity Effect," Operations Research, INFORMS, vol. 64(5), pages 1089-1108, October.
    4. Karolina Puławska, 2022. "Effects of the bank levy introduction on the interbank market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 844-864, January.
    5. Haelim Anderson & Mark Paddrik & Jessie Jiaxu Wang, 2019. "Bank Networks and Systemic Risk: Evidence from the National Banking Acts," American Economic Review, American Economic Association, vol. 109(9), pages 3125-3161, September.
    6. Huberto M. Ennis, 2016. "Models of Discount Window Lending: A Review," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 1-50.
    7. König, Philipp J. & Pothier, David, 2018. "Safe but fragile: Information acquisition, sponsor support and shadow bank runs," Discussion Papers 15/2018, Deutsche Bundesbank.
    8. Leonard Nakamura, 2014. "Durable Financial Regulation: Monitoring Financial Instruments as a Counterpart to Regulating Financial Institutions," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, pages 67-88, National Bureau of Economic Research, Inc.
    9. Nils Detering & Thilo Meyer-Brandis & Konstantinos Panagiotou & Daniel Ritter, 2018. "Financial Contagion in a Generalized Stochastic Block Model," Papers 1803.08169, arXiv.org, revised Dec 2019.
    10. Champagne, Claudia, 2014. "The international syndicated loan market network: An “unholy trinity”?," Global Finance Journal, Elsevier, vol. 25(2), pages 148-168.
    11. Efraim Benmelech & Ralf R. Meisenzahl & Rodney Ramcharan, 2017. "The Real Effects of Liquidity During the Financial Crisis: Evidence from Automobiles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(1), pages 317-365.
    12. Kyle D. Allen & Drew B. Winters, 2021. "Auditor response to changing risk: money market funds during the financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 1057-1086, April.
    13. Nicole Boyson & Jean Helwege & Jan Jindra, 2014. "Crises, Liquidity Shocks, and Fire Sales at Commercial Banks," Financial Management, Financial Management Association International, vol. 43(4), pages 857-884, December.
    14. Bargigli, Leonardo & Gallegati, Mauro, 2011. "Random digraphs with given expected degree sequences: A model for economic networks," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 396-411, May.
    15. Feinstein, Zachary, 2020. "Capital regulation under price impacts and dynamic financial contagion," European Journal of Operational Research, Elsevier, vol. 281(2), pages 449-463.
    16. Paul Pelzl & María Teresa Valderrama, 2019. "Capital regulations and the management of credit commitments during crisis times," DNB Working Papers 661, Netherlands Central Bank, Research Department.
    17. Fariba Karimi & Matthias Raddant, 2016. "Cascades in Real Interbank Markets," Computational Economics, Springer;Society for Computational Economics, vol. 47(1), pages 49-66, January.
    18. Cetina, Jill & Paddrik, Mark & Rajan, Sriram, 2018. "Stressed to the core: Counterparty concentrations and systemic losses in CDS markets," Journal of Financial Stability, Elsevier, vol. 35(C), pages 38-52.
    19. Alessandro Ferracci & Giulio Cimini, 2021. "Systemic risk in interbank networks: disentangling balance sheets and network effects," Papers 2109.14360, arXiv.org, revised Sep 2022.
    20. Miao He & Yanhong Guo, 2022. "Systemic Risk Contributions of Financial Institutions during the Stock Market Crash in China," Sustainability, MDPI, vol. 14(9), pages 1-14, April.

    More about this item

    Keywords

    resolution; bankruptcy; financial regulations; safety net;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedrwp:18-06. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Pascasio (email available below). General contact details of provider: https://edirc.repec.org/data/frbrius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.