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Research Details
The economics of banking regulation in Europe: does the post-GFC bail-in regime effectively eliminate implicit government guarantees?, The European Journal of Finance
Abstract
This paper assesses the market effects of regulatory events associated with the implementation of a bail-in regime for failing European banks. The bail-in regime was designed to make banks efficiently resolvable in order to abolish Implicit Government Guarantees (IGGs). We use a seemingly-unrelated-regressions framework to estimate the effects on Credit Default Swap (CDS) spreads and equity returns of key events associated with the two cornerstones of the European bail-in regime, the Bank Recovery & Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRM-R), and other relevant events. Contrary to the regulations’ objectives, we find that regulatory events associated with the implementation of BRRD and SRM-R led to tighter CDS spreads and higher equity returns over the 2009–2017 period. The pattern varies with bank heterogeneity and is particularly pronounced for global systemically important banks (G-SIBs), i.e. banks whose systemic risk profile is deemed to be of such importance that the bank's failure would trigger a wider financial crisis and threaten the global economy, suggesting that the regime does not effectively solve the systemic problem of bailout expectations in the European banking sector.
Type
Article
Author(s)
Axel Wieandt, Sascha Hahn, Paul P. Momtaz
Date Published
2022
Citations
Wieandt, Axel, Sascha Hahn, and Paul P. Momtaz. 2022. The economics of banking regulation in Europe: does the post-GFC bail-in regime effectively eliminate implicit government guarantees?. The European Journal of Finance.