Optimal Coordination of Bail-In and Bailout for Troubled Banks in China: An Interbank Network Contagion Approach

This study examines the optimal coordination of internal and external rescue for troubled banks under systemic contagion. Using annual data for 210 Chinese commercial banks from 2013 to 2024, it constructs a region-constrained minimum-density interbank network and embeds it in an EN-GLT dual-channel contagion framework that captures both direct default losses and asset fire-sale losses. Each bank is sequentially treated as the initially shocked institution, and pure internal rescue, pure external rescue, and mixed rescue strategies are compared under risk-tolerance, rescue-capacity, cost, and moral-hazard constraints. The results show that capital-loss contagion and fire-sale amplification are economically meaningful under the no-rescue scenario and become stronger as the fire-sale markdown rate rises. Mixed rescue outperforms pure internal or pure external rescue in most years, with the optimal internal rescue share mainly concentrated between 30% and 55%. The findings indicate that problem-bank resolution should combine internal loss absorption with external stabilization and should be differentiated according to contagion channels, bank type, and the nature of the crisis.