Abstract
Using the Eurosystem’s proprietary interbank loan data from June 2008–June 2020, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for a large set of other factors but has decreased over time, especially in countries that were stricken by the Sovereign Debt Crisis. A difference-in-differences analysis suggests that the decline in the size premium is related to the actual bail-in events, 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 results suggest 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.
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Notes
The data are nominal but deflating the series by the CPI does not make any noticeable difference in results.
The BRRD implementation dates may not be exogenous in the sense that member states may have considered the state of their systemically relevant banks when deciding about the implementation date. However, most sample countries belong to the banking union which implied a time frame within which the implementation was expected to be done. The great majority of the sample countries implemented the framework either in 2015 or 2016. Hence, we do not expect possible discretion as to the exact timing of the BRRD implementation in each country to materially affect our estimation results.
The list of Bellia and Maccaferri (2020) that we use includes bail-in events both from before and after the implementation of the BRRD, and our results in Table 4 are based on including all of them in the DD analysis. In unreported results we find that if we include only bail-in events that took place after implementation(s) of the BRRD, the estimated impact on the effective bank size premium is still negative but not statistically significant.
The history of all ECB open market operations is available at https://www.ecb.europa.eu/mopo/implement/omo/html/top_history.en.html.
We have also tested whether the interaction terms of different dummy variables with the size are jointly statistically significant. F-test indicates that in regression (1) the interaction terms D(T) x log(Total assets) are not jointly significant (p = 0.1731), but in regression (2) the interaction terms D(T) x GIIPS x log(Total assets) are jointly significant (p = 0.0008).
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Acknowledgments
We would like to thank George Pennacchi, Iftekhar Hasan, Jouko Vilmunen, an anonymous referee, and seminar participants at the Bank of Finland for valuable comments. All remaining errors are ours. Earlier version of this work has been circulated as “Are too-big-to-fail banks history in Europe? Evidence from overnight interbank loans”, Bank of Finland Discussion Paper No 29/2015. Eero Tölö is a member/alternate of one of the groups with access to TARGET2 data in accordance with Article 1(2) of Decision of ECB/2010/9 of 29 July 2010 on access to and use of certain TARGET2 data. The Bank of Finland and the MIPC have checked the paper against the rules for guaranteeing the confidentiality of transaction-level data imposed by the MIPC pursuant to Article 1(4) of the above-mentioned issue. The views expressed in the paper are solely those of the authors and do not necessarily represent the views of the Eurosystem or the Bank of Finland.
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Tölö, E., Jokivuolle, E. & Viren, M. Have Too-Big-to-Fail Expectations Diminished? Evidence from the European Overnight Interbank Market. J Financ Serv Res 60, 25–54 (2021). https://doi.org/10.1007/s10693-021-00351-2
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DOI: https://doi.org/10.1007/s10693-021-00351-2
Keywords
- Overnight rates
- Too-big-to-fail
- Bail-in
- Bailouts
- Implicit government guarantee
- Interbank borrowing costs
- Bank recovery and resolution directive