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

Working paper 755
Author(s): 
Roy Havemann
Publication date: 
July, 2018
Classification-JEL: 
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 signicant 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.
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