Correlation Networks to Measure the Systemic Implications of Banks Resolution

We propose a market-based, early warning measure of credit risk able to enhance the observed CDS spreads with a risk premium that derives from contagion by means of a correlation network model. We then combine the proposed measure with balance-sheet information and liabilities composition, in order to investigate the systemic contagion that arises from the resolution of a failing financial institution within the context of the European single resolution framework. To this aim we consider three alternative scenarios: liquidation, private recapitalisation or a bail-in resolution action. The application of our methodology reveals that, from the system's viewpoint, a private intervention and a bail-in resolution minimise losses with respect to the liquidation alternative. In addition, the bail-in resolution slightly reduces contagion effects with respect to a private intervention. Our empirical findings show that the proposed measure is quite effective to help the decision making process, from both an individual bank's perspective and an overall regulatory viewpoint