Credibility of Bank Resolution Regimes and Market Discipline: Evidence from Corporate Deposits

Abstract

This study examines changes in market discipline in European corporate deposit markets in response to different crisis periods and regulatory initiatives in the European Union. We measure market discipline by investigating the risk sensitivity of uninsured corporate deposits, i.e. by analyzing whether depositors demand risk premiums from risky banks. Depositors' risk sensitivity towards German banks substantially increased after the introduction of the German restructuring law. A similar effect can be observed for other eurozone banks after the introduction of the European bank recovery and resolution directive (BRRD). For German banks the introduction of the BRRD has no significant additional effect. Consequently, results suggest that both reforms have contributed to strengthen market discipline in the eurozone. We also document that the ECB's targeted long-term refinancing operations (TLTRO) weakened market discipline. As a response to the reduced liquidity risk of banks, corporate depositors became less risk sensitive.

Keywords: Market discipline, bailout, bank resolution, corporate deposits, central bank liquidity

JEL Classification: G21, G28, H81