Bail-In Power, Depositor Preference, and Asset Encumbrance: The End of Cheap Senior Unsecured Debt? A Structural Pricing Perspective

Chan‐Lau, Jorge A.; Oura, Hiroko

doi:10.2139/ssrn.2785992

Cited by 12 publications

(17 citation statements)

References 20 publications

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“…Similar to Giuliana (), we investigate the effectiveness of the new banking regulation by comparing the pricing reaction of unsecured and secured bonds. Indeed, as pointed out by Chan‐Lau and Oura (), the bail‐in increases the cost difference between bail‐inable and non‐bail‐inable bonds.…”

Section: Introductionmentioning

confidence: 76%

“…Hence, by focusing on the secondary market we would be disregarding a substantial share of the market. Additionally, we would not be able to offer evidence of the actual cost of funding borne by the banks which, instead, is observable from the primary market (i.e., Chan‐Lau & Oura, ; Sironi, ; Zaghini, ). To this extent, our research work aims to provide further evidence on the credibility of the bail‐in mechanism, which adds to current findings from the secondary market.…”

Section: Introductionmentioning

confidence: 98%

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Bail‐in rules and the pricing of Italian bank bonds

Crespi

Giacomini

Mascia

2019

Euro Fin Management

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We 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.

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Section: Introductionmentioning

confidence: 76%

Section: Introductionmentioning

confidence: 98%

Bail‐in rules and the pricing of Italian bank bonds

Crespi

Giacomini

Mascia

2019

Euro Fin Management

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“…To the best of our knowledge, few prior studies exist on this specific topic. Previous research describes the effect of the new regulation T A B L E 1 Sequence of write-down and conversion in the bail-in procedure 1. on the yield spread between bail-inable and non-bail-inable bonds without distinguishing among the different classes of bail-inable bonds (Chan-Lau & Oura, 2016;Crespi et al, 2019;Giuliana, 2019). Other studies focus only on senior bonds, given the market size and the opportunity to compare bail-inable senior bonds with other senior bonds excluded by the bail-in tool (Lewrick et al, 2019), or just on subordinated securities, since they are the primary target of bail-in in the case of a bank crisis (Cummings, Guo, & Wu, 2019;Götz & Tröger, 2016).…”

Section: Introductionmentioning

confidence: 99%

Do bond yields follow the hierarchy of risk post BRRD?

Cucinelli

Gai

Ielasi

2020

Euro Fin Management

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With a sample of 4,065 bonds issued by 63 banks from 12 euro area countries during 2013-2017, this study investigates how introducing bail-in regulation has influenced bond yields in secondary markets, by distinguishing between non-bail-inable and different classes of bail-inable bonds. The bail-in risk premium does not follow the hierarchy of risk; it is stronger for less risky bonds. The effect on the spread between senior unsecured and non-bail-inable bonds is much higher than for subordinated bonds. Regarding subordinated bonds, the impact is higher for securities excluded from regulatory capital than for those included.

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“…But it is not clear how to efficiently quantify this effect for the purpose of loss provisioning or stress testing. This paper draws on recent work on fitting lognormal asset value distributions to given probability of default (PD) and loss-given-default (LGD) estimates (Yang, 2015) and on asset encumbrance (Chan-Lau and Oura, 2014) to suggest simple and intuitive models for covered bonds that allows quantitative assessment of expected loss and the impact of asset encumbrance.…”

Section: Introductionmentioning

confidence: 99%

“…• In Section 3, we extend the lognormal one-asset model by Chan-Lau and Oura (2014) to a lognormal two-assets model and provide formulae for efficient numerical computation of expected losses for covered bonds, senior unsecured debt and junior debt with this model.…”

Section: Introductionmentioning

confidence: 99%

Fitting a Distribution to Value-at-Risk and Expected Shortfall, with an Application to Covered Bonds

Tasche

2015

SSRN Journal

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Covered bonds are a specific example of senior secured debt. If the issuer of the bonds defaults the proceeds of the assets in the cover pool are used for their debt service. If in this situation the cover pool proceeds do not suffice for the debt service, the creditors of the bonds have recourse to the issuer's assets and their claims are pari passu with the claims of the creditors of senior unsecured debt. Historically, covered bonds have been very safe investments. During their more than two hundred years of existence, investors never suffered losses due to missed payments from covered bonds. From a risk management perspective, therefore modelling covered bonds losses is mainly of interest for estimating the impact that the asset encumbrance by the cover pool has on the loss characteristics of the issuer's senior unsecured debt. We explore one-period structural modelling approaches for covered bonds and senior unsecured debt losses with one and two asset value variables respectively. Obviously, two-assets models with separate values of the cover pool and the issuer's remaining portfolio allow for more realistic modelling. However, we demonstrate that exact calibration of such models may be impossible. We also investigate a one-asset model in which the riskiness of the cover pool is reflected by a risk-based adjustment of the encumbrance ratio of the issuer's assets.

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Bail-In Power, Depositor Preference, and Asset Encumbrance: The End of Cheap Senior Unsecured Debt? A Structural Pricing Perspective

Cited by 12 publications

References 20 publications

Bail‐in rules and the pricing of Italian bank bonds

Bail‐in rules and the pricing of Italian bank bonds

Do bond yields follow the hierarchy of risk post BRRD?

Fitting a Distribution to Value-at-Risk and Expected Shortfall, with an Application to Covered Bonds

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