Trade-offs in Bank Resolution

Dell’Ariccia, Giovanni; Pería, María Soledad Martínez; Igan, Deniz; Awadzi, Elsie Addo; Dobler, Marc; Sandri, Damiano

doi:10.5089/9781484341001.006

Cited by 17 publications

(14 citation statements)

References 36 publications

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“…Public rescues of troubled banks are a source of moral hazard and they undermine market discipline (Acharya and Yorulmazer, 2008;Dell'Ariccia et al, 2018). Bailouts create expectations about future government responses to financial turmoil.…”

Section: Hypothesesmentioning

confidence: 99%

“…If there is no confidence that a bank failure can be managed in an orderly fashion and market participants still expect a public bailout, the resolution procedure could lead to further turmoil. In this light, some authors (Avgouleas and Goodhart, 2015;Dell'Ariccia et al, 2018) suggest that the bail-in mechanism might be inappropriate in the case of a systemic banking crisis. The bail-in approach might work better than bailout policies in the case of idiosyncratic distress, but not when there is a threat of systemic crisis or in the event of the collapse of a large cross-border European institution.…”

Section: Hypothesesmentioning

confidence: 99%

See 1 more Smart Citation

The European Bank Recovery and Resolution Directive: A market assessment

Pancotto

Gwilym

Williams

2019

Journal of Financial Stability

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This paper provides evidence of the impact of the new European bank resolution regime on the sovereign-bank nexus. The implementation of the Bank Recovery and Resolution Directive (BRRD) is considered as an exogenous shock which provides the setting for a natural experiment. This investigation tests the financial markets' perception of the effectiveness of the new rules in weakening the tight interconnectedness between sovereign and bank risk. A Difference-in-Differences (DiD) approach is adopted, building evidence from the Credit Default Swap (CDS) market for banks and nonfinancial corporates over the period 2011-18. The main findings do not indicate a significant weakening in the interaction between bank and sovereign CDS spreads, compared to the corresponding evidence for the non-financial corporate sector. An overall narrowing of the gap between bank and sovereign risk occurs, which initially implies a lack of credibility of the BRRD in financial markets. However, substantial cross-country variations are identified, particularly for Italy and non-euro area countries. These insights make a significant contribution to the policy debate on effective regulation of the sovereign-bank nexus, in the light of recent developments in the EU postcrisis reform agenda.

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Section: Hypothesesmentioning

confidence: 99%

Section: Hypothesesmentioning

confidence: 99%

The European Bank Recovery and Resolution Directive: A market assessment

Pancotto

Gwilym

Williams

2019

Journal of Financial Stability

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“…The redistribution of the risk between taxpayers, depositors and creditors, as a result of the new bail-in rules, together with an enhanced market discipline might also contribute to a reduction of the overall risk in the system. 7 Thanks to the bail-in powers and to an increased transparency, funding costs would better reflect the banking risk improving the overall financial stability (Dell'Ariccia et al, 2018). Therefore, a decrease in banks' CDS spreads would be expected, given their inherent nature as risk indicators.…”

Section: Cds Market Reactionmentioning

confidence: 99%

Market reactions to the implementation of the Banking Union in Europe

Pancotto

Gwilym

Williams

2019

The European Journal of Finance

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How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012-14. Announcements related to the implementation of the supervisory mechanism, as well as those on the new resolution framework, led to a surge in bank CDS spreads, while having a detrimental effect on the wealth of banks' shareholders. The CDS market response to sub-events associated with the ECB's 2014 Comprehensive Assessment (CA) was positive and reflected in a decrease in bank CDS spreads. Furthermore, CDS of Global Systemically Important Banks (G-SIBs) demonstrated a significant reaction to the implementation steps in the BU. Banks' stock prices reacted in a consistent manner with the CDS market. The stock futures market did not reveal any strong reaction to the changes in the European regulatory landscape. Cross-sectional analysis reveals that bank capitalization is positively associated with responses of G-SIBs' CDS spreads, but is inversely related to responses of CDS spreads for other bank groups. Weak underlying credit quality is also a relevant factor in explaining abnormal increases in quoted CDS spreads. For the stock market, positive associations of the cumulative abnormal returns (CARs) with capital levels and with the business model orientation are revealed.

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“…Our paper is also related to a recent theoretical literature that assesses the e¤ects of di¤erent approaches to bank resolution. Dell'Ariccia et al (2018) examine the costs and bene…ts of bail-ins and bail-outs, hinging on the trade-o¤ between the moral hazard costs associated with bail-outs and the potential spillovers arising from bail-ins. Colliard and Gromb (2017) show that the use of bail-in tools in bank resolution may reduce bank stakeholders incentives to restructure bank debt.…”

Section: Related Literaturementioning

confidence: 99%

Bank Resolution and Public Backstop in an Asymmetric Banking Union

Segura

Vicente

2018

SSRN Journal

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This paper characterizes the optimal banking union with endogenous participation in a two-country economy in which domestic bank failures may be contemporaneous to sovereign crises, giving rise to risk-sharing motives to mutualize the funding of bail-outs. Raising public funds to conduct a bail-out entails the deadweight loss of distortionary taxation. Bank bail-ins create disruption costs in the economy. When country asymmetry is large, resolution policies exhibit reduced contributions to the public backstop and forbearance in early bank intervention in the …scally stronger country, facilitating bail-outs in this country.

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Trade-offs in Bank Resolution

Cited by 17 publications

References 36 publications

The European Bank Recovery and Resolution Directive: A market assessment

The European Bank Recovery and Resolution Directive: A market assessment

Market reactions to the implementation of the Banking Union in Europe

Bank Resolution and Public Backstop in an Asymmetric Banking Union

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