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When do you Stop Supporting your Bankrupt Subsidiary? A Systemic...

Author
Maxim Bichuch, Nils Detering
Date Updated
2022/05/10
Category
q-fin.RM
Date Published
2022/01/30
Date Retrieved
2022/05/10
Description
We consider a network of bank holdings, where every holding has two subsidiaries of different types. A subsidiary can trade with another holding's subsidiary of the same type. Holdings support their subsidiaries up to a certain level when they would otherwise fail to honor their financial obligations. We investigate the spread of contagion in this banking network when the number of bank holdings is large, and find the final number of defaulted subsidiaries under different rules for the holding support. We also consider resilience of this multilayered network to small shocks. Our work sheds light onto the role that holding structures can play in the amplification of financial stress. We find that depending on the capitalization of the network, a holding structure can be beneficial as compared to smaller separated entities. In other instances it can be harmful and actually increase contagion. We illustrate our results in a numerical case study and also determine the optimal level of holding support from a regulator perspective.
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URL
https://arxiv.org/abs/2201.12731
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