Financial Conglomerates Research Articles

Belgium: Financial System Stability Assessment-Technical Note-Banking, Insurance, and Financial Conglomerate Supervision

Belgium: Financial System Stability Assessment-Technical Note-Banking, Insurance, and Financial Conglomerate Supervision

Economic Power, Development and Neoliberalism in Brazil

After its process of industrialization (1950s and first years of 1970s), the Brazilian industrial park became dominated by subsidiaries of large transnational companies that currently hold the control of productive value chains, especially medium and high technology. Neoliberal policies from the 1990s further contributed to internationalization of the industrial park by the privatization of state-owned enterprises, as well reinforcing foreign presence in value chains. Additionally, the “global outsourcing” system also promotes de-industrialization in some sectors. Those neoliberal policies are the result of the subordination of the interests of the national class to large transnational groups. Brazilian financial conglomerates also gain from the orthodox policy that supports neoliberalism. These interests prevent policies from creating a competitive and independent economy. Attempts to change this power structure are always blocked as disrespect to the economic orthodox thinking that serves as technical justification to neoliberalism. Is it still possible to break these relations of subordination and dependence towards real development?

Determinants and Consequences of Non-Interest Income Diversification of Commercial Banks in OECD Countries

This paper studies determinants and consequences of the changing income structure of commercial banks in the era of financial conglomeration. Utilizing a dataset of 662 relatively large commercial banks in 29 OECD countries from 1992 to 2006, we find that banks with relatively large asset sizes, low net interest margins, high impaired loan ratios, and high cost-income ratios tend to exhibit higher non-interest income shares. As for macroeconomic factors, banks in countries with slow economic growth, a stable inflation environment, and well- developed stock markets tend to show higher non-interest income shares. Second, we investigate the consequences of non-interest income expansion on bank profitability and risks. While the positive effects on profit and capital adequacy seem to become weaker under the consideration of macroeconomic factors and endogeneity problems, the adverse impact on profit variability remains robust. Overall, these findings suggest that expanding toward non-interest income may not produce desired income diversification effects, and it does not necessarily imply a shift toward superior return-risk frontiers.

Identifying Groups as Financial Conglomeratess Under European Financial Law (Directive 2002/87/EC): A Not So Straightforward Exercise

The purpose of this paper, structured in three Sections, is twofold: (a) The first is to analyse the conditions under which a group of financial firms is considered to be a ‘financial conglomerate’ in accordance with the (complex) definition of this term in Article 2 (point (14)) of the ‘Financial Conglomerates Directive’ (FICOD) of the European Parliament and of the Council (Directive 2002/87/EC, as in force) (Section B). (b) The second is to discuss the precise field of application, ratione personae, of that Directive in accordance with its Article 5 (Section C). Section A serves as a general introduction to the Directive, providing an overview of its adoption and evolution, its primary and secondary objectives and its field of application (both ratione personae (further analysed then in Sections B and C) and ratione materiae).

QUALITY OF FINANCIAL CONGLOMERATES’ PERFORMANCE IN EMERGING ECONOMY: THE INDUSTRIAL ORGANIZATION THEORY PERSPECTIVE

Financial conglomerates are financial institutions that provide all forms of financial services on the top of ordinary banking service. The quality of financial conglomerates’ performance depends on a number of factors namely ownership structure, internal capital market, and resources sharing. Research on the performance of financial conglomerates is still lacking in Indonesia. This study, therefore, is among the first attempt to assess the influence of ownership structure, internal capital market and resources sharing on the performance financial conglomerate firms in Indonesia, from the industrial-organizational theory perspectives. The methodology employed is the ex-post facto research design, using secondary data. The population of the study is all the conglomerate's firms listed on the Indonesian Stock Exchange between 2010 until 2015 persistently. The study used regression as a tool of analysis. Findings supported three out of the five hypotheses proposed. Efficient subsidy and managerial ownership had no significant influence on firms’ performance. Efficient transfer segment had a positive influence on firms’ performance. Similarly, the result supported the proposition that intangible and tangible resources had a positive effect on firms’ performance. DOI : https://doi.org/10.26905/jkdp.v21i2.649

(A Comparative Study on Legal Systems for Prevention of the Risk Contagion between Affiliates within Financial Conglomerates)

Korean Abstract: 1997년말 외환위기로 기업이 구조조정되면서 은행도 퇴출되는 것을 목격한 바 있고, 여기에 소요된 비용으로서 천문학적인 공적자금이 투여되었으나 그 회수에는 많은 어려움이 있는 것이 지금의 현실이다. 여기서 한 걸음 더 나아가 만약 은행 등 금융기관을 자회사로 둔 거대금융그룹인 금융지주회사가 파산한다면 그 부작용은 우리 경제에는 치명적일 것으로 생각된다. 따라서 이와 같은 거대금융그룹이 건전하고 안전하게 운영될 수 있는 방법의 모색으로 미국의 법인격부인론과 상호보증 및 힘의 원천이론을 고찰한 결론은 다음과 같다. 첫째 미국에서는 법인격부인론과 상호보증 및 힘의 원천이론의 적용에 대하여 법원과 학자들에 의하여 일반적으로 지지를 받고 있다는 것이다. 둘째 이와 같은 미국의 법인격부인론과 상호보증 및 힘의 원천이론을 우리법제에서 재점검한 바에 의하여도 여전히 적용하는 데에는 법리상 무리가 없다는 것이다. 끝으로 법인격부인론과 상호보증 및 힘의 원천이론이 우리법제에도 유용한 수단이라고 하더라도 이들 제도를 도입 또는 보완하기 위하여 법률의 제정 또는 개정작업 등 법제적인 정비작업이 수반되어야 것이다. 이를 통하여 거대금융그룹인 금융지주회사가 안전하고 건전하게 운영되어 해당 금융그룹도 발전하고 국가경제발전에도 일조하기를 기대해 본다. English Abstract: Recently many financial institutions are trying to convert their organizations into financial conglomerates through the financial holding company system in order to improve their competitiveness. However, there occur some side effects such as risk contagions between subsidiaries in financial conglomerates. Even though there are the economies of scale and scope in the financial conglomerates, the risk contagion must be prevented. In order to remove or decrease such a risk contagion under financial conglomerates, the article introduces three tools, such as the corporate veil piercing doctrine(hereinafter CVPD), the cross-guarantee provision(hereinafter CGP) and the source of strength doctrine (hereinafter SSD), reviews them critically and suggests some concluding observations as follows: First, the courts have successfully applied the CVPD, CGP and SSD to the United States and their applications have also been supported by many legal scholars. Second, such lessons from the United States can be also suitable for he Korea legal system by reexamining such tools in Korea. Third, even if such tools are suitable for Korea, some legislation or amendment is needed to be followed as adoption or modification of such tools.

Financial Conglomeration, IPO Underwriting, and Allocation in Japan

We examine whether financial conglomeration enhances efficiency of capital allocation or conflicts of interest, focusing on pricing and allocation of IPO stocks in Japan. Regarding underwriting of IPO stocks, our results are consistent with the bank certification hypothesis. As for IPO allocation, the main bank underwriters allocate little to mutual funds, but when they do, they allocate the more underpriced IPOs to unaffiliated mutual funds. We also find some locally consistent evidence supporting the nepotism hypothesis in aftermarket returns of IPO shares. Bank-involved allocation to mutual funds is, however, unrelated to risk-adjusted return (i.e., real quality) and to bank loan reduction in the aftermarket. Overall, the main banks and underwriters do not co-work to allocate new shares in a way that further certifies IPO quality, prompting institutional investors to hold longer in the aftermarket. This is in sharp contrast to U.S. IPO share allocation practice.

Divestitures and the Financial Conglomerate Excess Value

We study a sample of the world’s largest financial conglomerates from 15 countries and we track their largest divestitures over the period 2005-2016. We develop a novel market-based metric to analyse the impact of divestitures on financial conglomerate excess value, and our findings point to divestitures having a significant impact on financial conglomerate valuation, contributing to a reduced conglomerate discount. Our results are driven by sales of financial service assets. Selling assets unrelated to the financial sector has no significant effect on conglomerate excess value. These results are robust with the inclusion of multiple control variables and alternative econometric model specifications. Altogether these results cast doubts on the existence of large benefits for financial conglomerates from combining financial service activities. This study has implications both for financial conglomerate boards who might direct their strategies to downsize their firms, and for regulators who address issues related to financial stability.

Prospects for reform of banking supervision

The active system of the bank supervision structural organizational has been considered in the article. The types of the central bank’s participation in exercising of foreign countries’ bank supervision have been defined. The views of the followers of the exercising of the bank supervision in the central bank have been compared with those ones of their opponents. The suitability of the bank supervision separation from the National Bank of Ukraine has been reasoned.In the world there are several alternative systems of organization of supervision of the financial system that vary the degree and nature of the involvement of central banks in this process, that is, whether involved them in monitoring the system of payments, or are guarantors of liquidity in the markets, or supervise the banks, or provide insurance deposit or have a significant role in providing financial security and whether the anti-crisis program, and most importantly the possibility to implement it. The combination of these and many other similar criteria enables three main models for banking regulation. That they are considered in the article. Publication necessity that supervisors should have an efficient system of rapid exchange of information with each other for assessing overall risk and timely appropriate action in the event of problems with any institution that is part of a financial conglomerate, as well as to identify and address shortcomings regulatory activities. The authors concluded that a comprehensive system of banking supervisory system should consist of diagnosing and monitoring audit companies, management of bank supervision in individual bank formation system management strategies of banking supervision, management changes at the bank and the system as analysis of financial condition. All these systems should interact closely, to achieve excellent results in the banks and bank supervision.

Shareholders as Creditors of First Resort

We study firms’ decisions to enter public bond markets for the first time (bond IPOs). We show that a firm’s ability to access the public bond market is greatly improved by the presence of “habitual dual holders” (HDHs) – financial conglomerates which have the tendency to simultaneously hold both equity and bonds of their portfolio firms – among its shareholders. HDHs are more likely to buy bonds in the IPO and take larger bond positions than bond investors without equity stake in the firm. Larger equity ownership by HDHs is associated with a larger fraction of the issue ending up in the hands of pre-IPO shareholders, lower offering yield spreads, more covenants overall, but fewer covenants restricting payout to shareholders. Our results suggest that coordination of decisions within financial groups reduces the segmentation between debt and equity markets, thus, facilitating firms’ access to new sources of financing.

The Resolution of Distressed Financial Conglomerates

One of the most elegant legal innovations to emerge from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the FDIC’s single-point-of-entry (SPOE) initiative, whereby regulatory authorities will be in a position to resolve the failure of large financial conglomerates (corporate groups with regulated financial entities as subsidiaries) by seizing a top-tier holding company, downstreaming holding-company resources to distressed subsidiaries, wiping out holding-company shareholders while simultaneously imposing additional losses on holding-company creditors, and allowing the government to resolve the entire group without disrupting the business operations of operating subsidiaries (even those operating overseas) or risking systemic consequences for the broader economy. Although there is much to admire in the creativity underlying SPOE, the approach’s design also raises a host of novel and challenging questions of implementation. This chapter explores a number of these questions and elaborates upon the following points. First, in contrast to traditional approaches to resolving financial conglomerates, SPOE is premised on the continued support of all material operating subsidiaries, thereby potentially extending the scope of government support and thus posing the possibility of mission creep and expanded moral hazard. Second, SPOE contemplates the automatic downstreaming of resources to operating subsidiaries in distress, but effecting that support is likely to be more difficult than commonly understood. If too much support is positioned in advance, there may be inadequate reserves at the top level to support a single subsidiary that gets into an unexpectedly large amount of trouble. Alternatively, if too many reserves are retained at the holding-company level, commitments of subsidiary support may not be credible (especially to foreign authorities) and it may become difficult legally and practically to deploy those resources in times of distress. SPOE is most easy to envision operating in conjunction with the FDIC’s expanded authority under its Orderly Liquidation Authority (OLA) established under Title II of the Dodd-Frank Act. However, the act’s preferred regime for resolving failed financial conglomerates is the U.S. Bankruptcy Code (where Lehman was resolved) and not OLA. Several complexities could arise were a bankruptcy court today called upon to implement an SPOE resolution plan. While many legal experts are working on legislative proposals to amend the Bankruptcy Code to facilitate SPOE resolutions, there are a number of legal levers that federal authorities could deploy under current law to increase the likelihood that the SPOE strategy could be effected through traditional bankruptcy procedures. The task would be challenging and would require considerable advanced planning. But there are substantial benefits to be had from taking steps now to increase the likelihood that the bankruptcy option represents a viable and credible alternative for effecting SPOE transactions without resort to OLA and Title II of the Dodd-Frank Act.

The Resolution of Distressed Financial Conglomerates

One of the most elegant legal innovations to emerge from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the FDIC’s single-point-of-entry (SPOE) initiative, whereby regulatory authorities will be in a position to resolve the failure of large financial conglomerates (corporate groups with regulated financial entities as subsidiaries) by seizing a top-tier holding company, downstreaming holding-company resources to distressed subsidiaries, wiping out holding-company shareholders while simultaneously imposing additional losses on holding-company creditors, and allowing the government to resolve the entire group without disrupting the business operations of operating subsidiaries (even those operating overseas) or risking systemic consequences for the broader economy. Although there is much to admire in the creativity underlying SPOE, the approach’s design also raises a host of novel and challenging questions of implementation. This chapter explores a number of these questions and elaborates upon the following points. First, in contrast to traditional approaches to resolving financial conglomerates, SPOE is premised on the continued support of all material operating subsidiaries, thereby potentially extending the scope of government support and thus posing the possibility of mission creep and expanded moral hazard. Second, SPOE contemplates the automatic downstreaming of resources to operating subsidiaries in distress, but effecting that support is likely to be more difficult than commonly understood. If too much support is positioned in advance, there may be inadequate reserves at the top level to support a single subsidiary that gets into an unexpectedly large amount of trouble. Alternatively, if too many reserves are retained at the holding-company level, commitments of subsidiary support may not be credible (especially to foreign authorities) and it may become difficult legally and practically to deploy those resources in times of distress. SPOE is most easy to envision operating in conjunction with the FDIC’s expanded authority under its Orderly Liquidation Authority (OLA) established under Title II of the Dodd-Frank Act. However, the act’s preferred regime for resolving failed financial conglomerates is the U.S. Bankruptcy Code (where Lehman was resolved) and not OLA. Several complexities could arise were a bankruptcy court today called upon to implement an SPOE resolution plan. While many legal experts are working on legislative proposals to amend the Bankruptcy Code to facilitate SPOE resolutions, there are a number of legal levers that federal authorities could deploy under current law to increase the likelihood that the SPOE strategy could be effected through traditional bankruptcy procedures. The task would be challenging and would require considerable advanced planning. But there are substantial benefits to be had from taking steps now to increase the likelihood that the bankruptcy option represents a viable and credible alternative for effecting SPOE transactions without resort to OLA and Title II of the Dodd-Frank Act.

Financial Conglomerate Affiliated Hedge Funds: Risk Taking Behavior and Liquidity Transformation

Financial Conglomerate Affiliated Hedge Funds: Risk Taking Behavior and Liquidity Transformation

APPROACHES TO IDENTIFYING INSURANCE GROUPS

Introduction. The insurance group existence in the market and risks that are associated with insurance groups’ activities are led to the urgency of scientific research and determining the approaches to identify the insurance groups in Ukraine. Purpose. To study the international experience and national practice of the insurance groups identification and the insurance groups’ impact estimation on the insurance market. Results. The article analyzes the foreign practice of the insurance groups identification, the background of the IAIS emphasize the concept of “international insurance group” and the list of the insurance group identification criteria. The author examined the financial group creation ap-proaches: permissive, mixed, separate; and the insurance group identity indicators in Ukraine that are adopted by the National Commission for the Financial Service Markets Regulation of Ukraine. Author revealed the presence of insurance groups in the domestic insurance market that are controlled by international financial conglomerates; analyzed the insurance groups’ activity in Ukrainian market and studied their composition. The article contains the list of the insurance group performance indicators that are provided by the regulator; discloses the approach drawbacks that is developed by the National Commission for the Financial Service Markets Regulation for classifying companies as non-bank financial groups. Conclusion. The author formed the proposals that are aimed at improving transparency in the insurance market of Ukraine, such as: publication of information about the implementation of non-bank financial group of the regulatory requirements for regulatory capital adequacy. The article illuminates the financial performance indicators information of non-bank financial groups.

ADMINISTRATIVE AND LEGAL PRINCIPLES OF FUNCTIONING OF THE FINANCIAL SYSTEM IN UKRAINE AND EUROPE: A COMPARATIVE ANALYSIS

The purpose of the article is a comparative legal analysis of the administrative and legal principles of the functioning of the financial system in Ukraine and European countries. The subject of the study is the peculiarities of the state regulation of financial systems in Great Britain, Germany, Poland, Spain, Sweden, and Ukraine. Methodology. The research is based on comparing the legal regulation of the financial system in Ukraine and in the EU countries. An analysis of European experience in the administrative regulation of financial systems and financial activity has shown that most European states support the policy of regulating the financial system as a holistic, indivisible phenomenon, gradually moving away from its understanding as a set of separate segments. A significant influence on this issue was made by the European Union, within which there was introduced a combination of the most important functions in the regulation of the EU financial system and entrusting them to a separate group of special bodies. Results of the comparative legal study showed that, unlike most European countries, in Ukraine, the administrative and legal framework for the provision of certain components of the financial sector, in particular, banking, investment, tax and budget, financial services market, etc., are not combined into a single model of state regulation of financial system, but they are scattered. In turn, the lack of a unified legal basis for state regulation of the national financial system in practice creates a situation where such regulation is carried out by a large number of state bodies of varying degrees, whose powers are repeated in some cases, which causes contradictions. Practical implications. It is found that the key difference between the regulation of financial systems in the countries of Europe lies in the very principle of perceiving the role of the state in this process and understanding the content of the financial system as a whole. Financial consolidation and the formation of large financial conglomerates necessitates the replacement of the traditional regulatory paradigm, based on the consideration of the financial system as a set of segregated segments (insurance, banking, stock, etc.), taking into account the interconnectivity of various financial intermediaries. Value/originality. A comparative legal study of the basic principles of the functioning of the financial system in Ukraine and European countries provides a better understanding of the most promising directions of development of the domestic economic system in the context of strengthening the integration and globalization processes in the international financial and commodity markets.

Scientific and methodical approaches to determining the center-orientation of financial conglomerates with the factor and cluster analysis

Scientific and methodical approaches to determining the center-orientation of financial conglomerates with the factor and cluster analysis

Reciprocity in Shadow Bank Lending: Evidence from the Cross-Holding Relation in Money Market Funds

This paper documents a reciprocal cross-holding relation (CHR) between financial conglomerates: banks mutually hold each other's money market instruments through their affiliated money market funds (MMFs). Using novel MMF holdings data, this study shows that U.S. banks increased their MMFs' portfolio weights on bilateral-connected European financial firms after Moody's review of European banks in mid-2011---a unique period in which MMFs generally reduced their exposure to European issuers to avoid further redemptions. I provide evidence that this bias represents reciprocity between the bilaterally connected financial firms. In return, during the same period, European financial firms held larger shares of risky securities issued by their bilaterally connected U.S. partners through their affiliated MMFs. Issuer- or fund-characteristics do not fully explain the results.

Prelude to Glass-Steagall: Abusive Securities Practices by National City Bank and Chase National Bank During the 'Roaring Twenties'

From the late 1990s through 2008, the United States experienced the largest boom-and- bust cycle in its securities and housing markets since the “Roaring Twenties” and the Great Depression. Scholars have studied the events that led to the recent financial crisis and have compared those events to the causes of the Great Depression. In particular, analysts have considered whether “universal banks” – financial conglomerates that control deposit-taking banks as well as securities broker-dealers – played central roles in both crises.Congress responded to the Great Depression by adopting the Glass-Steagall Act of 1933, which outlawed first-generation universal banks and established a wall of separation between commercial banks and securities firms. During the 1980s and 1990s, regulators and courts steadily undermined Glass-Steagall, and Congress finally repealed the statute in 1999. Is it more than a coincidence that the demise of Glass-Steagall was followed by the most spectacular economic boom since the 1920s and the most serious financial and economic crisis since the 1930s? This article is part of a larger project in which I plan to examine the rise and fall of first-generation universal banks during the 1920s and 1930s and to compare their experience with the performance of second-generation universal banks during the 1990s and 2000s.As described in this article, first-generation universal banks became leading underwriters and distributors of securities in the United States during the 1920s. The preeminent universal banks of the 1920s were the two largest U.S. commercial banks – National City Bank (National City) and Chase National Bank (Chase). National City and Chase and their securities affiliates earned huge profits during the economic boom of the 1920s but suffered massive losses during the Great Depression. Both banks received bailouts from the Reconstruction Finance Corporation in December 1933.The Pecora Committee’s investigation in 1933 revealed that National City and Chase used deceptive and manipulative techniques to sell massive volumes of foreign bonds and other high-risk securities to ordinary investors and smaller financial institutions. Both banks made unsound loans to support the activities of their securities affiliates. Both banks organized trading pools to pump up the prices of their own stocks as well as the stocks of favored clients. Insiders took advantage of both banks’ securities operations to reap extraordinary financial gains. Revelations of both banks’ securities abuses and their top executives’ self-dealing triggered widespread public outrage and generated public support for enactment of the Glass-Steagall Act as well as the Securities Act of 1933 and the Securities Exchange Act of 1934. The abuses and conflicts of interest that occurred at National City and Chase illustrated the potential dangers of allowing commercial banks to affiliate with securities broker-dealers. The evidence produced by the Pecora Committee supported Glass-Steagall’s fundamental premise that universal banks created intolerable hazards that could not be resolved without dismantling the universal banking model. National City and Chase mobilized their deposits, lending resources, and retail branches to underwrite and sell high-risk securities to unsophisticated investors who trusted in both banks’ presumed soundness and investment expertise. National City and Chase exhibited pervasive conflicts of interest that caused both banks to make unsound loans to their securities affiliates, to investors who purchased securities from their affiliates, and to companies that issued securities underwritten by their affiliates.The disastrous experiences of National City and Chase demonstrated the clear dangers of allowing commercial banks to use their deposits and lending resources to promote speculative underwriting and trading operations. The near-collapse and bailouts of both banks also highlighted the systemic risks that arise when major banks establish close links with the securities markets.The hazards of universal banking became manifest again in the 1990s and 2000s. Second-generation universal banks played leading roles in securitizing and marketing high-risk, asset-backed securities (and related derivatives) that helped to precipitate the greatest worldwide boom and crash since the Great Depression. To prevent a collapse of global financial markets, government officials in the United States, United Kingdom, and Europe rescued troubled universal banks and supported not only their banking units but also their securities and other nonbanking subsidiaries. U.S. regulators arranged emergency deals that (1) converted two leading securities firms (Goldman Sachs and Morgan Stanley) into universal banks and (2) enabled existing universal banks (JPMorgan Chase and Bank of America) to become even larger by acquiring troubled securities firms. The foregoing government measures confirmed the existence of a “too-big-to-fail” (TBTF) policy that embraced the banking system as well as major segments of the securities and insurance markets. The Dodd-Frank Act of 2010 promised to end TBTF. However, many analysts believe that goal is a long way from being accomplished. As policymakers evaluate the desirability of further reforms to end TBTF, they should reconsider the lessons of the Great Depression as well as the wisdom of Glass-Steagall’s regime of structural separation between the banking industry and the securities markets.

The Impact of Financial Conglomeration on Risk and Return Performance in Indonesia Banking Industry

There is a tendency in financial market that occurs in many countries, in which some financial institutions formed to be conglomerate of financial institutions. They are created by combining a variety of financial services including commercial banking, insurance services and securities businesses into one company. The financial conglomerate is driven by the trend of globalization of trade, the development of technology and deregulation that led to the consolidation of cross-sector businesses. Conglomeration of financial institutions also occurred in Indonesia with the holding usually the bank holding company (BHC). According to Financial Services Authority (FSA), currently there are 31 financial institutions conglomerate operating in the Indonesian and control 77% of the financial institutions’ total assets. The conglomerate banks have several subsidiaries engaged in Islamic banking sector, securities firms as well as insurance companies with a composition of different investments.

How to measure interconnectedness between banks, insurers and financial conglomerates

Abstract Financial institutions’ interconnectedness is a key component of systemic risk. However there is still no consensus on its measurement. Using a unique database of network of exposures of French financial institutions, we compare three strategies to measure interconnectedness: closeness of exposure distributions, identification of core-periphery structure and contagion models. The closeness of exposure distributions is adequate to identify outlier institutions. The “core-periphery” structure, usually applied to banking network, is still valid with insurance companies. However this approach is not immune to size effect. This result contrasts with previous analyses where size was not accounted for. Contagion-based stress-tests are the best suited to capture institutions’ systemic fragility, emphasizing their importance as a supervisory tool.