Impact of Bail-In on Banks' Bond Yields and Market Discipline

The EU statutory bail-in regime attempts to promote market discipline and mitigate the too-big-to-fail problem by limiting governments' support for equity-holders and unsecured debt-holders of failing banks. This paper analyzes staggered events relating to the legislative process of the bail-in and its impositions on failing banks. I test if these events modified bail-in expectations among bond-holders. Difference-in-differences tests suggest that the events indicating an increased commitment to bail-in increased the difference in yield between unsecured (i.e., bailinable) and secured (i.e., non-bailinable) bonds. These results are not driven by the possible generalized instability associated with bail-ins. In addition, triple-differencing framework shows that bail-in was more effective for larger banks and that it improved market discipline.

[1]  A. Walther,et al.  Rules versus Discretion in Bank Resolution , 2019, The Review of Financial Studies.

[2]  Jennie Bai,et al.  The CDS-Bond Basis , 2018 .

[3]  P. Glasserman,et al.  The Market-Implied Probability of European Government Intervention in Distressed Banks , 2016 .

[4]  V. Acharya,et al.  The End of Market Discipline? Investor Expectations of Implicit Government Guarantees , 2016 .

[5]  Jorge A. Chan-Lau,et al.  Bail-In Power, Depositor Preference, and Asset Encumbrance: The End of Cheap Senior Unsecured Debt? A Structural Pricing Perspective , 2016 .

[6]  I. Schnabel,et al.  Bail-In Expectations for European Banks: Actions Speak Louder than Words , 2016, SSRN Electronic Journal.

[7]  C. Stern,et al.  Bail-in: who invests in noncovered debt securities issued by euro area banks? , 2016 .

[8]  S. Cappiello.  The Interplay between the EBA and the Banking Union , 2015 .

[9]  C. Hadjiemmanuil.  Bank Resolution Financing in the Banking Union , 2015 .

[10]  Oana Georgescu.  Effects of Fair - Value Relaxation during a Crisis: What are the Costs and Benefits? Evidence from the Reclassification of Financial Securities , 2014 .

[11]  Charles Goodhart,et al.  A Critical Evaluation of Bail-In as a Bank Recapitalisation Mechanism , 2014 .

[12]  John Cotter,et al.  Anatomy of a Bail-In , 2014, 1403.7628.

[13]  Wei Guan,et al.  Bond Market Event Study Methods , 2013 .

[14]  François Derrien,et al.  The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage , 2012 .

[15]  Michel Araten,et al.  Understanding the Funding Cost Differences between Global Systemically Important Banks (G-SIBs) and Non-G-SIBs in the United States , 2012 .

[16]  C. Bates,et al.  Legal aspects of bank bail-ins , 2011 .

[17]  Richard Frankel,et al.  Panacea, Pandora’s Box, or Placebo: Feedback in Bank Mortgage-Backed Security Holdings and Fair Value Accounting , 2011 .

[18]  B. Eckbo.  Banking System Bailout-Scandinavian Style , 2010 .

[19]  James S. Ang,et al.  Fire Sale Acquisitions: Myth vs. Reality , 2009 .

[20]  O. Couwenberg,et al.  The Costs of Chapter 11 in Context: American and Dutch Business Bankruptcy , 2009 .

[21]  D. Baker,et al.  The Value of the “Too Big to Fail” Big Bank Subsidy , 2009 .

[22]  Mary E. Barth,et al.  Market Reaction to the Adoption of IFRS in Europe , 2009 .

[23]  B. Eckbo,et al.  Automatic Bankruptcy Auctions and Fire-Sales , 2008 .

[24]  Tanju Yorulmazer,et al.  Cash-in-The-Market Pricing and Optimal Resolution of Bank Failures , 2007 .

[25]  H. Yildirim,et al.  An Examination of the Equity Market Response to the Gramm-Leach-Bliley Act Across Commercial Banking, Investment Banking, and Insurance Firms , 2006 .

[26]  Kathleen M. Kahle,et al.  Measuring Abnormal Bond Performance , 2009 .

[27]  Abdullah Al Mamun,et al.  The impact of the Gramm-Leach-Bliley act on the financial services industry , 2004 .

[28]  D. Hancock,et al.  A Reconsideration of the Risk Sensitivity of U.S. Banking Organization Subordinated Debt Spreads: A Sample Selection Approach , 2004 .

[29]  G. Kaufman,et al.  The Effect of Credit Risk on Bank and Bank Holding Company Bond Yields: Evidence from the Post-FDICIA Period , 2002 .

[30]  A. Sironi.  Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues , 2000 .

[31]  X. Freixas.  Optimal Bail Out Policy, Conditionality and Constructive Ambiguity , 1999 .

[32]  Frederic S. Mishkin.  Financial Consolidation: Dangers and Opportunities , 1999 .

[33]  M. Flannery.  Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence , 1998 .

[34]  Sorin M. Sorescu,et al.  Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991 , 1996 .

[35]  John Wagster.  Impact of the 1988 Basle Accord on International Banks , 1996 .

[36]  William J. Wilhelm,et al.  The Impact of the 1980 Depository Institutions Deregulation and Monetary Control Act on Market Value and Risk: Evidence from the Capital Markets , 1988 .

[37]  C. James.  An analysis of intra-industry differences in the effect of regulation: The case of deposit rate ceilings , 1983 .

[38]  Larry Y. Dann,et al.  An Analysis of the Impact of Deposit Rate Ceilings on the Market Values of Thrift Institutions , 1982 .