Bank Resolution Regimes and Systemic Risk

Abstract

Countries across the globe have undertaken substantial reforms of their bank resolution regimes over the past years.  Using a novel and detailed database on bank resolution regimes in 22 member countries of the Financial Stability Board, we show that systemic risk, as measured by Delta-CoVaR, increases more for banks in countries with more comprehensive bank resolution frameworks after negative system-wide shocks, such as Lehman Brothers' default, while it decreases more after positive system-wide shocks, such as Draghi's ``Whatever it takes'' speech.  These results suggest that more comprehensive bank resolution may exacerbate the effect of system-wide shocks and should not be solely relied on in cases of systemic distress.