The implications for bank risk posed by the bail-in amendments to the ranking of unsecured senior debt instruments in insolvency hierarchy

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Abstract

Given the scarce empirical research supporting the branch of literature investigating the shortcomings of the bail-in regime (Hadjiemmanuil, 2015; Walther & White, 2020; Tröger, 2020), this paper offers a contribution in this regard investigating the implications for bank risk posed by the amendments to the unsecured senior debt asset class required to enhance the bail-in regime. To this purpose, we use a sample of 46 banks distributed over 17 European countries over the period of Q1 2010–Q4 2019. We thus run a fixed effect panel data regression over the entire period and also over the subperiods before and after the start of the overhaul of the unsecured senior debt asset class. Our main result points out the significant role of unsecured senior debt in explaining bank’s risk after the start of the amendments campaign which allowed this asset class to serve the enhancement of the bail-in regime. We attribute this result to the uncertain gone-concern loss-absorbing capacity of unsecured senior debt and its material cost exacerbated by the bail-in buffer shortfall of many European banks. Our result pique policymakers’ attention to the side-effects of the amendments to the bail-in regime and further guide bank managers’ decisions about regulatory funding strategies.

Keywords: Unsecured Senior Debt, MREL, Bail-In, Credibility

Authors’ individual contribution: Conceptualization — E.G. and M.P.; Methodology — E.G. and G.V.; Software — G.V.; Validation — G.V., M.P., and E.G.; Formal Analysis — G.V.; Investigation — G.V.; Resources — L.J.; Data Curation — L.J. and G.V.; Writing — Original Draft — L.J., M.P., G.V., and E.G.; Writing — Review & Editing — G.V.; Visualization — G.V.; Supervision — M.P. and E.G.; Project Administration — E.G.; Funding Acquisition — M.P.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G21, G28, G33

Received: 28.01.2021
Accepted: 16.04.2021
Published online: 20.04.2021

How to cite this paper: Jones, L., Geretto, E., Polato, M., & Velliscig, G. (2021). The implications for bank risk posed by the bail-in amendments to the ranking of unsecured senior debt instruments in insolvency hierarchy. Journal of Governance & Regulation, 10(2), 108–117. https://doi.org/10.22495/jgrv10i2art10