Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Banks: Empirical Evidence F03-V2
We analyze the reaction of European bank CDS spreads in response to the SIFI-regulation. Our results suggest that new regulation prepared by the FSB did not succeed in lowering bail-out expectations for the targeted banks. The findings show an overall decrease in CDS spreads and hence indicating both: an unintended rise in bail-out expectations and distortionary funding cost advantages for banks equipped with a SIFI-badge. The strongest drop in CDS spreads occurred when the SIFI list was published for the first time, revealing that the effect is particularly pronounced upon the initial designation. We furthermore show that the inadvertent rise in bail-out expectations is driven by the countries bail-out capacity, measured as total country bank assets over GDP. As a result, the SIFI badge creates a particular large value for SIFIs hosted in countries with small banking sectors that are credibly expected to be bailed-out by the government.