Have Bail-in Policies Reduced Too-Big-To-Fail Expectations? Evidence from the European Overnight Interbank Market

Abstract

<p> Larger European banks have had a lower cost of overnight borrowing in the interbank market than smaller banks, but this size premium has decreased in recent years. Is this trend thanks to the implemented anti-bailout policies? Our analysis suggests that the decline in the size premium is related to actual bail-in events of failed banks but 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 evidence suggests 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 in Europe. <br></p>