DP14724 Bank Resolution Regimes and Systemic Risk

Author(s): Thorsten Beck, Deyan Radev, Isabel Schnabel
Publication Date: May 2020
Keyword(s): bail-in, Bank resolution regimes, systemic risk
JEL(s): G01, G21, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14724

We assess the ability of bank resolution frameworks to deal with systemic banking fragility. 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 â?³CoVaR, 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 Mario 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.