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Bank Resolution Trade-Offs Under Coupled Liquidity and Credit Risks: An Agent-Based Network Analysis of Systemic
Qianqian Gao1, Hongjie Pan2, Yinglin Liu1
1School of Financial Technology, Shanghai Lixin University of Accounting and Finance, Shanghai 201209, China.
Entropy (Basel, Switzerland)
|June 26, 2026
Summary
This study explores bank resolution strategies for managing credit and liquidity risks. Combining debt relief with asset sales enhances systemic resilience, offering crucial insights for financial stability.
Area of Science:
- Financial Economics
- Systemic Risk Analysis
- Agent-Based Modeling
Background:
- Global economic downturns elevate banks' credit risk and liquidity management challenges.
- Effective bank resolution is critical for maintaining systemic stability.
Purpose of the Study:
- To examine trade-offs in bank resolution strategies under coupled liquidity and credit risks.
- To analyze the impact of different strategies on systemic stability using agent-based modeling.
Main Methods:
- Development of a dynamic agent-based financial network model.
- Simulation of bank resolution strategies including asset sales, liability expansion, debt relief, and debt extension.
- Analysis of default probability, expected returns, and systemic stability.
Main Results:
- Asset-sale strategy shows nonlinear effects on default probability and returns; performs better than liability expansion at moderate asset depreciation.
- Debt-relief strategy significantly improves systemic stability.
- Debt-extension strategy's effectiveness is contingent on liquidity management and asset sale conditions.
Conclusions:
- Combining debt relief with asset sales yields synergistic benefits for systemic resilience.
- Coordinated and adaptive frameworks are essential for banks and regulators to manage financial risks and ensure stability.
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