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

56 Pages Posted: 27 Jan 2016

See all articles by Alexander Schäfer

Alexander Schäfer

Johannes Gutenberg University Mainz - Faculty of Law and Economics

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Beatrice Weder

University of Mainz - Department of Economics

Date Written: January 2016

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, creditor participation, event study, Single Resolution Mechanism

JEL Classification: G21, G28

Suggested Citation

Schäfer, Alexander and Schnabel, Isabel and Weder di Mauro, Beatrice, Bail-In Expectations for European Banks: Actions Speak Louder than Words (January 2016). CEPR Discussion Paper No. DP11061. Available at SSRN: https://ssrn.com/abstract=2723322

Alexander Schäfer (Contact Author)

Johannes Gutenberg University Mainz - Faculty of Law and Economics ( email )

Chair of Corporate Finance
D-55099 Mainz, 55128
Germany

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

HOME PAGE: http://www.finance.uni-bonn.de/schnabel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49-228-9141665 (Phone)
+49-228-9141621 (Fax)

HOME PAGE: http://www.coll.mpg.de/team/page/isabel_schnabel

Beatrice Weder di Mauro

University of Mainz - Department of Economics ( email )

Chair of Corporate Finance
D-55099 Mainz, 55128
Germany
+49 613 1392 0144 (Phone)
+49 613 1392 5053 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
3
Abstract Views
847
PlumX Metrics