Can creditor bail-in trigger contagion? The experience of an emerging market

17 July 2018
Author: Roy Havemann
Publication Type: Working Paper
JEL Code: G11, G23, G38
The successful bail-in of creditors in African Bank, a small South African monoline lender, provides an opportunity to evaluate the intended and unintended consequences of new resolution tools. Using a data set that matches quarterly, daily and nancial-instrument level data, I show that the bail-in led to money-market funds `breaking the buck’, triggering signi cant redemptions and some nancial contagion. To limit potential systemic effects, the authorities used complementary interventions, including imposing discretionary liquidity restrictions on mutual funds and market-making facilities for affected nancial instruments. This supported a sustainable restructuring of the bank and reduced nancial spillovers. The lesson is that future interventions using these new resolution tools should take into account the potential unintended systemic implications, particularly in smaller jurisdictions where there is a high degree of interconnectedness between bank and non-bank nancial institutions.
Series title: Working paper 755
1 July 2018
Journal: Review of Finance
16 August 2018
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