Bail-ins and market discipline: Evidence from China

Shanshan Li, Di Gong and Liping Lu

International Review of Economics & Finance, 2024, vol. 93, issue PB, 51-68

Abstract: We examine the effect of bail-in event on the market discipline for Chinese banks, exploiting the bankruptcy of Baoshang Bank and subsequent write-down as a quasi-natural experiment. Using the bond data of banks from 2016 to 2021, we find that the bail-in event leads to higher issuance spreads for bonds with write-down clauses. This effect is more pronounced for bonds issued by small banks, and banks in regions with weaker local fiscal strength. A higher proportion of CoCo bond in the bank capital increase the risk-taking of small banks. CoCo bond issuance reduces the spread of Negotiable Certificates of Deposit (NCDs) after the event due to a stronger buffer effect. We underscore the role of bail-in event in imposing market discipline in an emerging economy like China.

Keywords: Bail-in; Market discipline; CoCo bonds; Implicit guarantee (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pb:p:51-68

DOI: 10.1016/j.iref.2024.04.019

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