The Impact of Bail-in Risk on Bank Bondholders

  •  Lorenzo Gai    
  •  Federica Ielasi    
  •  Martina Mainini    


The paper investigates the impact of the bail-in regulation on bank bond secondary markets. Using data on outstanding bonds issued by significant Euro-Area banks, the study carries out pooled panel regression analyses to determine the association between yields of “bailinable” and “bailinable” bonds. The paper also analyses the impact of the bail-in tool in relation to bank leverage, which affects the potential severity of losses for bondholders in the case of bail-in. With a sample of 4,855 bonds issued by 45 banks from January 2006 to December 2016, we find an increase in the risk premium for unsecured bonds, and senior unsecured bonds show the greatest effect on yields and yield spread when bail-in regulation came into force. Moreover, a “bail-in severity” premium, related to bank leverage, is identified.

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