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Completing the European Banking Union: Capital cost consequences for credit providers and corporate borrowers

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  • Koetter, Michael
  • Krause, Thomas
  • Sfrappini, Eleonora
  • Tonzer, Lena
Abstract
The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks without burdening tax payers. We exploit the staggered implementation of the BRRD across 15 European Union (EU) member states to identify banks' capital cost and capital structure responses. In a first stage, we show that average capital costs of banks increased. WACC hikes are lowest in the core countries of the European Monetary Union (EMU) compared to formerly stressed EMU and non-EMU countries. This pattern is driven by changes in the relative WACC weight of equity in response to the BRRD, which indicates enhanced financial system resilience. In a second stage, we document asymmetric transmission patterns of banks' capital cost changes on to corporates' borrowing terms. Only EMU banks located in core countries that exhibit higher WACC are those that also increase firms' borrowing cost and contract credit supply. Hence, the BRRD had unintended consequences for selected segments of the real economy.

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  • Koetter, Michael & Krause, Thomas & Sfrappini, Eleonora & Tonzer, Lena, 2021. "Completing the European Banking Union: Capital cost consequences for credit providers and corporate borrowers," IWH Discussion Papers 4/2021, Halle Institute for Economic Research (IWH).
    • Handle: RePEc:zbw:iwhdps:42021
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    1. Koetter, Michael & Krause, Thomas & Sfrappini, Eleonora & Tonzer, Lena, 2021. "Staggered completion of the European Banking Union: Transposition dates of the BRRD. Data record description," IWH Technical Reports 1/2021, Halle Institute for Economic Research (IWH).
    2. Pancotto, Livia & ap Gwilym, Owain & Molyneux, Philip, 2023. "Deal! Market reactions to the agreement on the EU Covid-19 recovery fund," Journal of Financial Stability, Elsevier, vol. 67(C).
    3. Brausewetter, Lars & Ludolph, Melina & Tonzer, Lena, 2023. "Distributional income effects of banking regulation in Europe," IWH Discussion Papers 24/2023, Halle Institute for Economic Research (IWH).
    4. Emlein, Moritz Fabian & Sfrappini, Eleonora & Tonzer, Lena & Zgherea, Cristina, 2022. "Capital Markets Union: Database of directives and regulations," IWH Technical Reports 2/2022, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    bail-in; banking union; funding costs; real effects;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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