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Probabilistic causality and decisions on bailouts of financial institutions

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This paper uses probabilistic causality measures to support decisions about bailouts of financial institutions in non-crisis periods. The model suggested is simple and can easily be applied by practitioners. The approach is tested with daily market-based data of six large UK financial institutions. Contrary to what many experts claim, this study shows evidence that rescuing financial institutions is not always needed in order to prevent systemic crises.

Keywords: bailouts, systemic risk, systemically important institutions, probabilistic causality

Document Type: Research Article

Publication date: 01 March 2017

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  • Journal of Risk Management in Financial Institutions is the essential professional and research journal for all those involved in the management of risk at retail and investment banks, investment managers, broker-dealers, hedge funds, exchanges, central banks, financial regulators and depositories, as well as service providers, advisers, researchers and academics. Guided by expert Editors and an eminent Editorial Board, each quarterly 100-page issue does not publish advertising but rather in-depth articles, reviews and applied research by leading professionals and researchers in the field on six key inter-related areas: strategic and business risk, financial risk, including traditional/exotic credit, market and liquidity risks, operational risk, regulatory and legal risks, systemic risk, and sovereign risk.

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