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Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles

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  • Rodrigo Barbone Gonzalez
  • Dmitry Khametshin
  • RJose-Luis Peydro
  • Andrea Polo

Abstract

Bail-in regulation is a centrepiece of the post-crisis overhaul of bank resolution. It requires major banks to maintain a sufficient amount of "bail-in debt" that can absorb losses during resolution. If resolution regimes are credible, investors in bail-in debt should have a strong incentive to monitor banks and price bail-in risk. We study the pricing of senior bail-in bonds to evaluate whether this is the case. We identify the bail-in risk premium by matching these bonds with comparable senior bonds that are issued by the same banking group but are not subject to bail-in risk. The premium is higher for riskier issuers, consistent with the notion that bond investors exert market discipline on banks. Yet the premium varies pro-cyclically: a decline in marketwide credit risk lowers the bail-in risk premium for all banks, with the compression much stronger for riskier issuers. Banks, in turn, time their bail-in bond issuance to take advantage of periods of low premia.

Suggested Citation

  • Rodrigo Barbone Gonzalez & Dmitry Khametshin & RJose-Luis Peydro & Andrea Polo, 2019. "Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles," BIS Working Papers 832, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:832
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    Cited by:

    1. Barbone Gonzalez, Rodrigo & Khametshin, Dmitry & Peydró, José Luis & Polo, Andrea, 2018. "Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles," CEPR Discussion Papers 12817, C.E.P.R. Discussion Papers.
    2. Boris Hofmann & Hyun Song Shin, 2019. "FX intervention and domestic credit: Evidence from high-frequency micro data," BIS Working Papers 774, Bank for International Settlements.
    3. Pierre-Richard Agénor & Timothy Jackson & Luiz Awazu Pereira da Silva, 2020. "Foreign exchange intervention and financial stability," BIS Working Papers 889, Bank for International Settlements.
    4. Syarifuddin, Ferry & Izzulhaq, Syahid, 2020. "The Effectiveness of Futures-based Foreign Exchange Intervention: Comparative Studies of Brazil and India," MPRA Paper 104709, University Library of Munich, Germany.
    5. Gabor, Daniela, 2020. "The Wall Street Consensus," SocArXiv wab8m, Center for Open Science.

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    More about this item

    Keywords

    foreign exchange; monetary policy; central bank; bank credit; hedging;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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