Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/265234 
Year of Publication: 
2022
Series/Report no.: 
ESRB Working Paper Series No. 133
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
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).
Subjects: 
Bail-in
Fixed-income Claims
Expectations
Rating
Market Discipline
Risk-taking
Cost of Capital
Financial Stability
JEL: 
G21
G28
H81
C23
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-255-3
Document Type: 
Working Paper

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