When Do You Stop Supporting Your Bankrupt Subsidiary? A Systemic Risk Perspective

35 Pages Posted: 13 Apr 2023

See all articles by Maxim Bichuch

Maxim Bichuch

State University of New York (SUNY) - Buffalo

Nils Detering

University of California, Santa Barbara (UCSB)

Date Written: March 30, 2023

Abstract

We consider a network of bank holdings, where every holding has two subsidiaries of different types. A subsidiary can trade with another holding's subsidiary of the same type. Holdings support their subsidiaries up to a certain level when they would otherwise fail to honor their financial obligations. We investigate the spread of contagion in this banking network when the number of bank holdings is large, and find the final number of defaulted subsidiaries under different rules for the holding support. We also consider resilience of this multilayered network to small shocks. Our work sheds light onto the role that holding structures can play in the amplification of financial stress.

We find that depending on the capitalization of the network, a holding structure can be beneficial as compared to smaller separated entities. In other instances it can be harmful and actually increase contagion. We illustrate our results in a numerical case study and also determine the optimal level of holding support from a regulator perspective.

Keywords: systemic risk, financial contagion, holdings, subsidiaries, multilayered networks

JEL Classification: G32, G33

Suggested Citation

Bichuch, Maxim and Detering, Nils, When Do You Stop Supporting Your Bankrupt Subsidiary? A Systemic Risk Perspective (March 30, 2023). Available at SSRN: https://ssrn.com/abstract=4405306 or http://dx.doi.org/10.2139/ssrn.4405306

Maxim Bichuch (Contact Author)

State University of New York (SUNY) - Buffalo ( email )

12 Capen Hall
Buffalo, NY 14260
United States

Nils Detering

University of California, Santa Barbara (UCSB) ( email )

South Hall 5504

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