Have Too-Big-To-Fail Expectations Diminished? Evidence from the European Overnight Interbank Market
Tölö, Eero; Jokivuolle, Esa; Virén, Matti (15.08.2021)
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JulkaisusarjaJournal of Financial Services Research
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-202002181190
Using the Eurosystem’s proprietary interbank loan data from June 2008–June 2020, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for a large set of other factors but has decreased over time, especially in countries that were stricken by the Sovereign Debt Crisis. A difference-in-differences analysis suggests that the decline in the size premium is related to the actual bail-in events, not to the implementation dates of the Bank Recovery and Resolution Directive as such. This finding is robust to controlling for the effect of the ECB’s long-term refinancing operations. Overall, the results suggest that the regulatory move towards bail-in rather than bailout policies to deal with financially distressed banks has reduced the too-big-to-fail expectations concerning large banks.
Published in BoF DP 29/2015 http://urn.fi/URN:NBN:fi:bof-201512151482