Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles

Rodrigo Gonzalez, Dmitry Khametshin, Jose-Luis Peydro and Andrea Polo

No 832, BIS Working Papers from Bank for International Settlements

Abstract: Bail-in regulation is a centrepiece of the post-crisis overhaul of bank resolution. It requires major banks to maintain a sufficient amount of "bail-in debt" that can absorb losses during resolution. If resolution regimes are credible, investors in bail-in debt should have a strong incentive to monitor banks and price bail-in risk. We study the pricing of senior bail-in bonds to evaluate whether this is the case. We identify the bail-in risk premium by matching these bonds with comparable senior bonds that are issued by the same banking group but are not subject to bail-in risk. The premium is higher for riskier issuers, consistent with the notion that bond investors exert market discipline on banks. Yet the premium varies pro-cyclically: a decline in marketwide credit risk lowers the bail-in risk premium for all banks, with the compression much stronger for riskier issuers. Banks, in turn, time their bail-in bond issuance to take advantage of periods of low premia.

Keywords: foreign exchange; monetary policy; central bank; bank credit; hedging (search for similar items in EconPapers)
JEL-codes: E5 F3 G01 G21 G28 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Hedger of last resort: Evidence from Brazilian FX interventions, local credit, and global financial cycles (2022)
Working Paper: Hedger of Last Resort: Evidence from Brazil on FX Interventions, Local Credit and Global Financial Cycles (2022)
Working Paper: Hedger of last resort: evidence from Brazilian FX interventions, local credit, and global financial cycles (2020)
Working Paper: Hedger of Last Resort: evidence from Brazilian FX interventions, local credit, and global financial cycles (2019)
Working Paper: Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit, and Global Financial Cycles (2019)
Working Paper: Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:832

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