The Systemic Implications of Bail-In: A Multi-Layered Network Approach

43 Pages Posted: 3 Feb 2017

See all articles by Anne-Caroline Hüser

Anne-Caroline Hüser

Bank of England

Grzegorz Halaj

European Central Bank (ECB)

Christoffer Kok

European Central Bank (ECB)

Cristian Perales

European Central Bank (ECB)

Anton F. van der Kraaij

Maastricht University

Date Written: February 2, 2017

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.

Keywords: bail-in, resolution regimes, financial networks, policy simulation, systemic risk

JEL Classification: G01, G18, G21, C63

Suggested Citation

Hüser, Anne-Caroline and Halaj, Grzegorz and Kok, Christoffer and Perales, Cristian and van der Kraaij, Anton F., The Systemic Implications of Bail-In: A Multi-Layered Network Approach (February 2, 2017). ECB Working Paper No. 2010. Available at SSRN: https://ssrn.com/abstract=2910945

Anne-Caroline Hüser (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Grzegorz Halaj

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Cristian Perales

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Anton F. Van der Kraaij

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

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