Bail-in Expectations for European Banks: Actions Speak Louder than Words

Isabel Schnabel, Beatrice Weder di Mauro and Schäfer, Alexander

No 11061, CEPR Discussion Papers from Centre for Economic Policy Research

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: Bail-in; Bank restructuring; Single resolution mechanism; Creditor participation; Event study (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-cba and nep-eec
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Citations: View citations in EconPapers (48)

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