Abstract
AbstractWe analyze whether the introduction of the bail‐in tool in January 2016 affected the pricing of Italian bank bonds. Using a unique dataset of 1,798 fixed‐rate bonds issued during the period 2013–2016, we find an increase of the spread at issuance of bail‐inable bonds compared to non‐bail‐inable bonds. This increase also depends on the intrinsic characteristics of each bank. Large institutions, banks with lower ratings, profitability, capitalization, and higher liquidity faced a higher cost of issuing bail‐inable bonds. Overall, our results seem to support the hypothesis of an improved market discipline for the bank bond primary market.
Highlights
Since the onset of the Global Financial Crisis a decade ago, many European Governments were forced to intervene through capital injections and purchase of toxic assets in order to support their troubled banks (Ammann et al, 2017) and, avoid financial contagion within closely interconnected banking systems (Deutsche Bank, 2014)
The introduction of the Bank Recovery and Resolution Directive (BRRD) Directive can affect banks risk-taking propensity and stability, but it can have an impact on the bank funding costs because the bail-in rules transfer risk from taxpayers to unsecured bondholders.3. Because of this increased risk, holders of bail-inable liabilities may be expected to ask, ceteris paribus, for higher returns compared to holders of liabilities that are excluded from the bail-in mechanism
Following Schäfer et al (2016), we show that the implementation of the quasi bail-in just some weeks before the effective entry into force of the BRRD contributed to lead retail investors demanding a higher premium for their investment in bank bonds
Summary
Since the onset of the Global Financial Crisis a decade ago, many European Governments were forced to intervene through capital injections and purchase of toxic assets in order to support their troubled banks (Ammann et al, 2017) and, avoid financial contagion within closely interconnected banking systems (Deutsche Bank, 2014). Because taxpayers’ money was used to manage the crisis of (mostly private) banks, public bailouts resulted unsustainable from both a financial and a political perspective. The expectation of assistance via publicly funded bailouts amplifies moral hazard behavior, leading to excessive risk-taking in particular for large institutions (Hüser et al, 2017; Pais and Stork, 2013; Zhao, 2018). Large banks benefit of an implicit public guarantee, as they are supposed to be more likely bailed out than smaller institutions (i.e., they are “too-big-to-fail”). This represents an important market distortion as it allows large banks to raise funding at cheaper rates (Ueda and Weder Di Mauro, 2013)
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