Debt Holder Monitoring and Implicit Guarantees: Did the BRRD Improve Market Discipline?
Posted: 16 Oct 2017
Date Written: October 15, 2017
Yes. This paper argues that the introduction of the Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. By exploiting the differential impact of the BRRD on bank bonds, I am able to simulate a quasi natural experiment using a difference-in-difference framework. This allows to study the effect of the BRRD within bank. My novel identification strategy is based on the fact that bonds maturing before 2016 were explicitly excluded from bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD somewhat diminished bail-out expectations. Bail-in-able bank bonds carry a 0.1 percentage point bail-in premium in terms of the yield spread. The work presented therefore sheds new light on the growing literature on debt-holder monitoring and whether implicit guarantees distort market discipline.
Keywords: bailin, bailout, banking regulation, BRRD, market discipline, monitoring
JEL Classification: G18, G21, H81
Suggested Citation: Suggested Citation