Implementing a European Bail-In Regime: Do BRRD & SRM-R Effectively Eliminate Implicit Government Guarantees in the European Banking Sector? An Empirical Analysis

64 Pages Posted: 12 Aug 2020 Last revised: 29 Oct 2020

See all articles by Sascha Hahn

Sascha Hahn

WHU - Otto Beisheim School of Management

Paul P. Momtaz

University of California, Los Angeles (UCLA) - Anderson School of Management; Technische Universität München (TUM) - TUM School of Management; University College London Center for Blockchain Technologies

Axel Wieandt

WHU - Otto Beisheim School of Management

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Date Written: October 7, 2020

Abstract

During the last decade, policymakers have implemented a European bank resolution regime, which includes the Bank Recovery & Resolution Directive and the Single Resolution Mechanism Regulation, designed to make banks resolvable and to abolish bailout expectations, i.e. implicit government guarantees (IGGs). The regime strives to make banks’ debt bail-in-able and to make government bailouts of banks the rare exception. The overall research objective of this paper is to measure the effectiveness of this regime in terms of bailout expectations in the form of funding advantages. Specifically, we examine market reactions to regime implementation, using an event- study framework to quantify the impact of key legal events on credit default swap (CDS) spreads and equity returns. We control for a wide range of variables to address endogeneity concerns raised with regard to omitted variables in prior work. Our uni-variate and multivariate analysis results suggest that the European bail-in regime alone does not effectively eliminate IGGs. On the contrary, CDS spreads, especially among global systemically important banks, are tightening and equity returns are increasing. This indicates that the regime inadequately solves the systemic problem of bailout expectations in the market.

Keywords: Bail-In, Implicit Government Guarantee, European Banking Regulation, Too-Big-to- Fail, Global Systemically Important Bank (G-SIB), Bank Recovery & Resolution Directive (BRRD), Single Resolution Mechanism (SRM)

JEL Classification: E58, G18, G21, G23, G33, G38

Suggested Citation

Hahn, Sascha and Momtaz, Paul P. and Wieandt, Axel, Implementing a European Bail-In Regime: Do BRRD & SRM-R Effectively Eliminate Implicit Government Guarantees in the European Banking Sector? An Empirical Analysis (October 7, 2020). Available at SSRN: https://ssrn.com/abstract=3645298 or http://dx.doi.org/10.2139/ssrn.3645298

Sascha Hahn (Contact Author)

WHU - Otto Beisheim School of Management ( email )

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Paul P. Momtaz

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Technische Universität München (TUM) - TUM School of Management ( email )

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Germany

University College London Center for Blockchain Technologies ( email )

UCL CBT UCL Computer Science
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London, London
United Kingdom

Axel Wieandt

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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