J. Doyne Farmer, Charles Goodhart, Alissa Kleinnijenhuis, 01 October 2021

Since the Great Financial Crisis, bail-in has been introduced as an approach to address too-big-to-fail and contagion risk problems. This column uses a multi-layered network model of the European financial system to study the implication of bail-in design on financial stability. It shows that early implementation of a bail-in and stronger bank recapitalisation lead to lower contagion losses. However, current bail-in design seems to be in the region of instability and the political economy of incentives makes reforms unlikely in the near future. 

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