Correlation Networks to Measure the Systemic Implications of Banks Resolution

30 Pages Posted: 15 Aug 2017

See all articles by Paolo Giudici

Paolo Giudici

University of Pavia

Laura Parisi

European Central Bank (ECB)

Date Written: June 20, 2017

Abstract

We propose a market-based, early warning measure of credit risk able to enhance the observed CDS spreads with a risk premium that derives from contagion by means of a correlation network model. We then combine the proposed measure with balance-sheet information and liabilities composition, in order to investigate the systemic contagion that arises from the resolution of a failing financial institution within the context of the European single resolution framework. To this aim we consider three alternative scenarios: liquidation, private recapitalisation or a bail-in resolution action. The application of our methodology reveals that, from the system’s viewpoint, a private intervention and a bail-in resolution minimise losses with respect to the liquidation alternative. In addition, the bail-in resolution slightly reduces contagion effects with respect to a private intervention. Our empirical findings show that the proposed measure is quite effective to help the decision making process, from both an individual bank’s perspective and an overall regulatory viewpoint.

Keywords: Bail-In, CDS Spreads, Financial Networks, Systemic Risk

JEL Classification: C21, C58, E44, G21

Suggested Citation

Giudici, Paolo and Parisi, Laura, Correlation Networks to Measure the Systemic Implications of Banks Resolution (June 20, 2017). Available at SSRN: https://ssrn.com/abstract=3018034 or http://dx.doi.org/10.2139/ssrn.3018034

Paolo Giudici

University of Pavia ( email )

Via San Felice 7
27100 Pavia, 27100
Italy

Laura Parisi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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