Debt Holder Monitoring and Implicit Guarantees: Did the BRRD Improve Market Discipline?

Posted: 16 Oct 2017

See all articles by Jannic Cutura

Jannic Cutura

Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2017

Abstract

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

Cutura, Jannic, Debt Holder Monitoring and Implicit Guarantees: Did the BRRD Improve Market Discipline? (October 15, 2017). Available at SSRN: https://ssrn.com/abstract=3053514 or http://dx.doi.org/10.2139/ssrn.3053514

Jannic Cutura (Contact Author)

Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students ( email )

Grüneburgplatz 1
Frankfurt
Germany

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