Expected Bail-in Costs, Bank Risk-taking and Real Effects

54 Pages Posted: 30 Dec 2022

See all articles by Bálint L. Horváth

Bálint L. Horváth

University of Arizona - Eller College of Management

Consuelo Silva Buston

Pontificia Universidad Católica de Chile - School of Business

Date Written: December 29, 2022

Abstract

We estimate expected bail-in costs for an international sample of banks by comparing spreads of credit default swaps (CDS) that only differ in terms of whether they insure against the bailing in of a distressed banks’ creditors. Using these estimated bail-in costs we study bank risk taking and the resulting impacts on borrowers. We estimate on average 17% higher CDS spreads due to bail-in, which is higher in riskier countries, in countries with stronger and more independent regulators, as well as after general elections. We find that expected bail-in costs reduce bank risk-taking, consistent with enhanced market discipline. Finally, riskier firms obtain loans with a higher spread, and experience lower investments and asset growth, if they borrow from banks with high bail-in costs.

Keywords: CDS, bail-in, bank resolution

JEL Classification: G1, G2

Suggested Citation

Horváth, Bálint L. and Silva Buston, Consuelo, Expected Bail-in Costs, Bank Risk-taking and Real Effects (December 29, 2022). Available at SSRN: https://ssrn.com/abstract=4314236 or http://dx.doi.org/10.2139/ssrn.4314236

Bálint L. Horváth (Contact Author)

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Consuelo Silva Buston

Pontificia Universidad Católica de Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

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