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Bail-in expectations for European banks: Actions speak louder than words

Author

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  • Schäfer, Alexander
  • Schnabel, Isabel
  • Weder di Mauro, Beatrice

Abstract

The declared intention of policy makers is that future bank restructuring should be conducted through bail-in rather than bail-out. Over the past years there have been a few cases of European banks being restructured where creditors were bailed in. This paper exploits these events to investigate the market reactions of stock prices and credit default swap (CDS) spreads of European banks in order to gauge the extent to which it is expected that bail-in will indeed become the new regime. We find evidence of increased CDS spreads and falling stock prices most notably after the bail-in in Cyprus. However, bail-in expectations appear to depend on the sovereign’s fiscal strength, i. e., reactions are stronger for banks in countries with limited fiscal space for bail-out. Moreover, actual bail-ins lead to stronger market reactions than the legal implementation of bank resolution regimes, supporting the saying that actions speak louder than words. JEL Classification: G21, G28

Suggested Citation

  • Schäfer, Alexander & Schnabel, Isabel & Weder di Mauro, Beatrice, 2016. "Bail-in expectations for European banks: Actions speak louder than words," ESRB Working Paper Series 7, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:20167
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrbwp7.en.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    bail-in; bank restructuring; creditor participation; event study; Single Resolution Mechanism;
    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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