Do bank resolution reforms reduce banks' equity capital implicit subsidy

Do bank resolution reforms reduce banks' equity capital implicit subsidy

• Author
• Lucas N. C. Vasconcelos
• Co-authors
• Rafael F. Schiozer , Emanuela Giacomini
• Abstract

• This research test if international banks’ resolution reforms that change the main resolution from bailouts to bail-in reduce the implicit government subsidy to financial institutions captured by its stock abnormal returns. To solve the endogeneity issue related to the voluntary nature of the regulation we apply an instrumental variable approach based on the cumulative years of past banking crises. Our results support an effect of new bank resolutions on non-large banks that shows an increase of 4.12 percentage points in their abnormal return after the bail-in regulation. This effect is stronger for distressed banks and banks in fiscal deficit countries. But we do not find any effect on the abnormal returns of large and global systemic important banks. These results are a warning sign for a possible failure of bank resolution regulations in convincing investors that the resources used to save banks in a default event will come from the shareholders and debtholders, not from taxpayers.

• Keywords
• Bank Resolution Reforms, Implicit Subsidy, Too-Big-to-Fail, Cost of Equity.
• Subject Area
• Corporate Finance, Intermediation, and Banking

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