Determinants of European Large Bank Stock Market Volatility : Is There a Bail-In Effect?

On the first of January 2016 the European bank recovery and resolution directive (BRRD) started to enter into force. Before the BRRD, governments often performed "bail-out" of distressed banks. Instead after the BRRD, the Single Resolution Fund and governments intervene only after the writing-off of the stocks (and other financial instruments), so shareholders of the biggest European banks lose their money in the case of bank rescue. This could imply a larger risk that can be observed in the stock market volatility. In this paper we perform a panel data analysis on a sample of large European banks finding that in 2016 the model for the stock market volatility changes and the changes can be theoretically consistent with the introduction of the BRRD. Moreover Italy shows an even larger volatility. This could be due to the strong presence of retail investors owning bank shares, who could have understood the risk related to the BRRD only after the burden sharing of four Italian banks in November 2015. This finding can be a warning about the level of market efficiency, with possible implications also for the systemic risk of a "bail-in" procedure