Fluctuating bail-in expectations and effects on market discipline, risk-taking and cost of capital

Arbeitspapier

Through the compulsory participation of junior investors in bearing losses of their failing bank, the bailin attempts to limit bail-outs' side-effects in terms of market discipline, too-big-to-fail, bank-sovereign nexus and risk-taking. This paper assesses the consequences of bail-in expectations along these dimensions ensuring - through a bond pricing study - that bail-in expectations are not confounded by other factors. Using hand-collected details of EU bail-in events, I study both positive and negative exogenous shocks to bail-in expectations, offering three sets of findings. First, bail-in events can reinforce (or weaken) bail-in expectations, as shown by Khwaja-Mian tests (validated by placebo analyses). Second, bail-in expectations promote market discipline, and mitigate too-big-to-fail and banksovereign nexus. Third, bail-in effects on bank resilience appear mixed. While it incentivises banks to reduce risk-taking (e.g., increasing risk-weighted equity by a third of Basel III requirement), it also remarkably exacerbates total funding costs through an increase in equity cost (partially off-set by a debt cost reduction).

Object Details

• ISBN: 978-92-9472-255-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESRB Working Paper Series ; No. 133

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
• Subject: Bail-in ; Fixed-income Claims ; Expectations ; Rating ; Market Discipline ; Risk-taking ; Cost of Capital ; Financial Stability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Giuliana, Raffaele
• Event: Veröffentlichung
• (who): European Systemic Risk Board (ESRB), European System of Financial Supervision
• (where): Frankfurt a. M.
• (when): 2022

Further information

• DOI: doi:10.2849/33367
• Handle: http://hdl.handle.net/10419/265234
• Last update: 10.03.2025, 11:42 AM CET