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Bail-in regulation and stock market reaction

Author

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  • Fiordelisi, Franco
  • Minnucci, Federica
  • Previati, Daniele
  • Ricci, Ornella

Abstract

In response to the global financial turmoil and sovereign debt crisis, the European Union has introduced a new bail-in resolution mechanism based on the shared burden of losses between shareholders, debt-holders, and depositors. By focusing on the abnormal stock price reactions to bail-in policy announcements, this paper shows that investors perceive the new bail-in regime as a credible tool to decrease government interventions, reduce the too-big-to-fail problem, and increase market discipline in the European banking industry.

Suggested Citation

  • Fiordelisi, Franco & Minnucci, Federica & Previati, Daniele & Ricci, Ornella, 2020. "Bail-in regulation and stock market reaction," Economics Letters, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519304069
    DOI: 10.1016/j.econlet.2019.108801
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    References listed on IDEAS

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    6. Schäfer, Alexander & Schnabel, Isabel & Weder di Mauro, Beatrice, 2016. "Bail-in Expectations for European Banks: Actions Speak Louder than Words," CEPR Discussion Papers 11061, C.E.P.R. Discussion Papers.
    7. Papanikolaou, Nikolaos I., 2018. "A dual early warning model of bank distress," Economics Letters, Elsevier, vol. 162(C), pages 127-130.
    8. Emilios Avgouleas & Charles Goodhart, 2015. "Critical Reflections on Bank Bail-ins," Journal of Financial Regulation, Oxford University Press, vol. 1(1), pages 3-29.
    9. Fiordelisi, Franco & Galloppo, Giuseppe & Ricci, Ornella, 2014. "The effect of monetary policy interventions on interbank markets, equity indices and G-SIFIs during financial crisis," Journal of Financial Stability, Elsevier, vol. 11(C), pages 49-61.
    10. Paolo Mattana & Filippo Petroni & Stefania Patrizia Sonia Rossi, 2015. "A test for the too-big-to-fail hypothesis for European banks during the financial crisis," Applied Economics, Taylor & Francis Journals, vol. 47(4), pages 319-332, January.
    11. Chiorazzo, Vincenzo & D'Apice, Vincenzo & DeYoung, Robert & Morelli, Pierluigi, 2018. "Is the traditional banking model a survivor?," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 238-256.
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    Cited by:

    1. Valentin PAUNA & Amelia DIACONU & Svetlana PLATAGEA GOMBOS & Raluca Iuliana GEORGESCU, 2022. "Banking management in the prism liquidity – profitability interrelation," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(630), S), pages 93-100, Spring.
    2. Fiordelisi, Franco & Girardone, Claudia & Minnucci, Federica & Ricci, Ornella, 2020. "On the nexus between sovereign risk and banking crises," Journal of Corporate Finance, Elsevier, vol. 65(C).
    3. Giuliana, Raffaele, 2022. "Fluctuating bail-in expectations and effects on market discipline, risk-taking and cost of capital," ESRB Working Paper Series 133, European Systemic Risk Board.
    4. Martien Lamers & Thomas Present & Nicolas Soenen & Rudi Vander Vennet, 2023. "BRRD credibility and the bank-sovereign nexus," Applied Economics Letters, Taylor & Francis Journals, vol. 30(10), pages 1308-1313, June.
    5. Vittoria Cerasi & Paola Galfrascoli, 2021. "Bail-in and Bank Funding Costs," Working Papers 472, University of Milano-Bicocca, Department of Economics, revised Jul 2021.
    6. Cerasi, Vittoria & Galfrascoli, Paola, 2023. "Bail-in and bank funding costs," Journal of International Money and Finance, Elsevier, vol. 137(C).
    7. Soenen, Nicolas & Vander Vennet, Rudi, 2022. "Determinants of European banks’ default risk," Finance Research Letters, Elsevier, vol. 47(PA).
    8. Graziano, Elvira Anna & Fattobene, Lucrezia & Ricci, Ornella & Scimone, Xenia, 2023. "Market reactions to Recovery Fund press releases during COVID-19: An event-study analysis," Economics Letters, Elsevier, vol. 230(C).
    9. Yousaf, Imran & Goodell, John W., 2023. "Responses of US equity market sectors to the Silicon Valley Bank implosion," Finance Research Letters, Elsevier, vol. 55(PB).
    10. Hryckiewicz, Aneta & Kryg, Natalia & Tsomocos, Dimitrios P., 2023. "Bank resolution mechanisms revisited: Towards a new era of restructuring," Journal of Financial Stability, Elsevier, vol. 67(C).
    11. Fiordelisi, Franco & Scardozzi, Giulia, 2022. "Bank funding strategy after the bail-in announcement," Journal of Corporate Finance, Elsevier, vol. 74(C).
    12. Martien Lamers & Thomas Present & Nicolas Soenen & Rudi Vander Vennet, 2023. "Does BRRD mitigate the bank-to-sovereign risk channel?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 23/1060, Ghent University, Faculty of Economics and Business Administration.

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    More about this item

    Keywords

    Bail-in; Banking crises; Event study;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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