Template-Type: ReDIF-Paper 1.0
Author-Name: Ulf Lewrick
Author-X-Name-First: Ulf
Author-X-Name-Last: Lewrick
Author-Name: José María Serena Garralda
Author-X-Name-First: José María
Author-X-Name-Last: Serena Garralda
Author-Name: Grant Turner
Author-X-Name-First: Grant
Author-X-Name-Last: Turner
Title: Believing in bail-in? Market discipline and the pricing of bail-in bonds
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.
Length: 36 pages
Creation-Date: 2019-12
File-URL: https://www.bis.org/publ/work831.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work831.htm
File-Format: text/html
Number: 831
Classification-JEL: E44, E61, G28
Keywords: too big to fail, banking regulation, TLAC, financial stability
Handle: RePEc:bis:biswps:831