The systemic implications of bail-in: A multi-layered network approach

Authors: Anne-Caroline Hüser (Goethe University and ECB), Grzegorz Hałaj (ECB), Christoffer Kok (ECB), Cristian Perales (ECB), Anton van der Kraaij (ECB)

Title: The systemic implications of bail-in: A multi-layered network approach

Abstract: We present a multi-layered network model where each layer represents the securities cross-holdings of a specific seniority among the largest euro area banking groups. The network is constructed using ECB proprietary data on banking group level securities holdings statistics and supervisory data. On this basis, the bail-in of a bank can be simulated to identify the contagion risk to the other banks in the network. Specifically, the network model is able to quantify exactly the size of the potential direct contagion channels due to security cross-holdings in the network and the potential impact of the bail-in of a large euro area banking group on its peers as well as on national banking sectors in the euro area. Finally, we inform the policy discussion on the loss absorbing capacity of banks, since we can pinpoint which types of creditors will be bailed in depending on the initial asset loss and the recapitalization level of the bank under resolution.