Working Paper: CEPR ID: DP11061
Authors: Alexander Schaefer; Isabel Schnabel; Beatrice Weder di Mauro
Abstract: The declared intention of policy makers is that future bank restructuring should be conducted through bail-in rather than bail-out. Over the past years there have been a few cases of European banks being restructured where creditors were bailed in. This paper exploits these cases to investigate the market reactions of stock prices and credit default swap (CDS) spreads of European banks in order to gauge the extent to which it is expected that bail-in will indeed become the new regime. We find evidence of increased CDS spreads and falling stock prices most notably after the bail-in in Cyprus. However, bail-in expectations appear to depend on the sovereign?s fiscal strength, i.e., reactions are stronger for banks in countries with limited fiscal space for bail-out. Moreover, actual bail-ins lead to stronger market reactions than the legal implementation of bank resolution regimes, supporting the saying that actions speak louder than words.
Keywords: bailin; bank restructuring; creditor participation; event study; single resolution mechanism
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bail-in events (G33) | increase in CDS spreads (F65) |
| bail-in events (G33) | decrease in stock prices (G10) |
| bail-in events (G33) | reduction in bailout expectations (G28) |
| bail-in in Cyprus (G28) | significant market reactions (G14) |
| bail-in events in Denmark and Spain (F65) | negligible effects (F69) |
| bail-in of SNS Reaal (G28) | significant market reactions for banks in GIIPS (F65) |
| bail-in events (G33) | more impactful in countries with less fiscal capacity (F69) |
| actual bail-ins (G28) | substantial effect on market perceptions (G14) |
| words (implementation of SRM) (Y20) | less effect on market perceptions than actions (actual bail-ins) (G28) |