Believing in bail-in? Market discipline and the pricing of bail-in bonds

Ulf Lewrick, Jose Maria Serena Garralda and Grant Turner

No 831, BIS Working Papers from Bank for International Settlements

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.

Keywords: too big to fail; banking regulation; TLAC; financial stability (search for similar items in EconPapers)
JEL-codes: E44 E61 G28 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (9)

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