Are European Banks Still Too-Big-to-Fail? The Impact of Government Interventions and Regulatory Reform on Bailout Expectations in the EU

59 Pages Posted: 9 Jan 2018 Last revised: 10 Apr 2021

Date Written: January 9, 2018

Abstract

I investigate the implications of government interventions and regulatory reform on too-big-too-fail expectations in the European banking sector. Evidence from stock returns over the period 1993 to 2016 suggests that large European banks have long benefitted and continue to benefit from implicit government guarantees. I document that investors are willing to accept lower risk-adjusted returns for large bank stocks relative to small bank stocks, because they anticipate that governments absorb part of these stocks’ downside risk during financial crises. Recent regulatory reform introducing bail-in and a common standardized resolution framework for European banks were successful in reducing implicit guarantees at first, but became less credible after the effective implementation of these rules came into question in early 2016.

Keywords: European Banks, European Financial Crisis, Regulatory Reform, Too-Big-to-Fail

JEL Classification: G12, G18, G21

Suggested Citation

Borchert, Lea, Are European Banks Still Too-Big-to-Fail? The Impact of Government Interventions and Regulatory Reform on Bailout Expectations in the EU (January 9, 2018). Available at SSRN: https://ssrn.com/abstract=3098296 or http://dx.doi.org/10.2139/ssrn.3098296

Lea Borchert (Contact Author)

University of Mannheim ( email )

L9, 1-2
Mannheim, 68131
Germany

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