Debt holder monitoring and implicit guarantees: Did the BRRD improve market discipline?

This paper argues that the European Union’s Banking Recovery and Resolution Directive (BRRD) has improved market discipline in bank for unsecured debt. The different impact of BRRD on bonds provides a quasi-natural experiment allows us to study effects within banks using difference-in-difference approach. Identification is based fact (otherwise identical) given maturing before 2016 are explicitly protected from bail-in. empirical results consistent with hypothesis debt holders actively monitor diminished bailout expectations after its enactment. Bank subject bail-in carry 13-basis points premium terms yield spread, driven by low capitalization. Banks respond pressure de-risking their portfolios able secure cheaper funding instruments