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

43 Pages Posted: 5 Nov 2020 Last revised: 18 Nov 2021

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 3 versions of this paper

Date Written: October, 2020

Abstract

This paper argues that the European Unions Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver.

JEL Classification: G18, G21, H81

Suggested Citation

Cutura, Jannic, Debt Holder Monitoring and Implicit Guarantees: Did the BRRD Improve Market Discipline? (October, 2020). ESRB: Working Paper Series 2020/111, Available at SSRN: https://ssrn.com/abstract=3723467 or http://dx.doi.org/10.2139/ssrn.3723467

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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