Have Too-Big-to-Fail Expectations Diminished? Evidence from the European Overnight Interbank Market

Eero Tölö (), Esa Jokivuolle () and Matti Viren ()
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Eero Tölö: Snellmaninaukio
Esa Jokivuolle: Snellmaninaukio
Matti Viren: Snellmaninaukio

Journal of Financial Services Research, 2021, vol. 60, issue 1, No 2, 25-54

Abstract: Abstract Using the Eurosystem’s proprietary interbank loan data from June 2008–June 2020, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for a large set of other factors but has decreased over time, especially in countries that were stricken by the Sovereign Debt Crisis. A difference-in-differences analysis suggests that the decline in the size premium is related to the actual bail-in events, not to the implementation dates of the Bank Recovery and Resolution Directive as such. This finding is robust to controlling for the effect of the ECB’s long-term refinancing operations. Overall, the results suggest that the regulatory move towards bail-in rather than bailout policies to deal with financially distressed banks has reduced the too-big-to-fail expectations concerning large banks.

Keywords: Overnight rates; Too-big-to-fail; Bail-in; Bailouts; Implicit government guarantee; Interbank borrowing costs; Bank recovery and resolution directive (search for similar items in EconPapers)
JEL-codes: G21 G22 G24 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10693-021-00351-2

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