Getting to Bail-in: Effects of Creditor Participation in European Bank Restructuring

The declared intention of policy makers is that future bank restructuring should be conducted through bail-in rather than bail-out. Over the past years there have been a few cases of European bank restructuring where bail-in was implemented. This paper exploits these events to investigate the market reactions of stock prices and credit default swap (CDS) spreads of other European banks in order to gauge the evolving expectation that bail-in will indeed become the new regime. We find evidence of increased CDS spreads and falling stock prices after bail-in most notably after the events in Cyprus. We also find that bail-in expectations seem to depend on the sovereign s strength, i. e., reactions are stronger for banks in countries with little fiscal space for bail-out. Conversely, bail-out expectations seem to have hardly declined in fiscally stronger countries, such as Germany.