Believing in Bail-In? Market Discipline and the Pricing of Bail-In Bonds

36 Pages Posted: 18 Dec 2019

See all articles by Ulf Lewrick

Ulf Lewrick

Bank for International Settlements (BIS) - Monetary and Economic Department; University of Basel - Faculty of Business and Economics

José María Serena

Bank for International Settlements (BIS)

Grant Turner

Reserve Bank of Australia

Date Written: December 17, 2019

Abstract

Bail-in regulation is a centrepiece of the post-crisis overhaul of bank resolution. It requires major banks to maintain a sufficient amount of "bail-in debt" that can absorb losses during resolution. If resolution regimes are credible, investors in bail-in debt should have a strong incentive to monitor banks and price bail-in risk. We study the pricing of senior bail-in bonds to evaluate whether this is the case. We identify the bail-in risk premium by matching these bonds with comparable senior bonds that are issued by the same banking group but are not subject to bail-in risk. The premium is higher for riskier issuers, consistent with the notion that bond investors exert market discipline on banks. Yet the premium varies pro-cyclically: a decline in marketwide credit risk lowers the bail-in risk premium for all banks, with the compression much stronger for riskier issuers. Banks, in turn, time their bail-in bond issuance to take advantage of periods of low premia.

Keywords: too big to fail, banking regulation, TLAC, financial stability

JEL Classification: E44, E61, G28

Suggested Citation

Lewrick, Ulf and Serena, Jose Maria and Turner, Grant, Believing in Bail-In? Market Discipline and the Pricing of Bail-In Bonds (December 17, 2019). BIS Working Paper No. 831, Available at SSRN: https://ssrn.com/abstract=3505408

Ulf Lewrick (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

Jose Maria Serena

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Grant Turner

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
156
Abstract Views
613
Rank
283,985
PlumX Metrics