Title: Impact of bail-in on banks' bond yields and market discipline
Authors: Raffaele Giuliana - City University London and Central Bank of Ireland (United Kingdom) [presenting]
Abstract: The EU statutory bail-in regime attempts to promote market discipline and mitigate the too-big-to-fail problem by limiting governments' support for equity-holders and unsecured debt-holders of failing banks. The purpose is to analyze staggered events relating to the legislative process of the bail in and its impositions on failing banks. We test if these events modified bail-in expectations among bond-holders. Difference-in-differences tests suggest that the events indicating an increased commitment to bail-in increased the difference in yield between unsecured (i.e., bailinable) and secured (i.e., non-bailinable) bonds. These results are not driven by the possible generalized instability associated with bail-ins. In addition, triple-differencing framework shows that bail-in was more effective for larger banks and that it improved market discipline.