- 24 May 2016
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2016Details
- The new bail-in tool in the EU bank resolution toolkit is an important step forward to safeguard financial stability in Europe, notably in relation to mitigating moral hazard and other problems inherent in a strong reliance on bailouts. At the same time, it is important to understand the potential contagion channels in the financial system following a bail-in and prior to resolution in order to assess potential systemic implications of the use of the bail-in tool. This special feature outlines salient features of the new requirements and then presents a multi-layered network model of banks’ bail-inable securities that could help in gauging potential contagion risk and, prior to a resolution, identifying mitigating measures to avoid systemic implications.
- JEL Code
- G00 : Financial Economics→General→General
- 2 February 2017
- WORKING PAPER SERIES - No. 2010Details
- 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 Code
- G01 : Financial Economics→General→Financial Crises
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling
- 24 May 2018
- FINANCIAL STABILITY REVIEW - BOXAssessing the financial stability risks of a possible repricing in the market for subordinated bank bondsFinancial Stability Review Issue 1, 2018Details
- The cost of subordinated bank debt in the euro area is low and may be susceptible to repricing. Euro area bank bond yields and spreads have narrowed significantly since mid-2016, reaching levels last observed prior to the global financial crisis. The reductions have been particularly noticeable in the markets for subordinated bonds.57 Against this background, this box first evaluates whether there are indications that the prices of these bonds may be vulnerable to a correction. It then assesses the potential financial implications stemming from a spread reversal in euro area subordinated bank bonds. The box focuses in particular on the holders of these instruments and examines the sectors that may be particularly vulnerable to a turnaround in this market.