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Bail-ins and market discipline: Evidence from China

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  • Li, Shanshan
  • Gong, Di
  • Lu, Liping
Abstract
We examine the effect of bail-in event on the market discipline for Chinese banks, exploiting the bankruptcy of Baoshang Bank and subsequent write-down as a quasi-natural experiment. Using the bond data of banks from 2016 to 2021, we find that the bail-in event leads to higher issuance spreads for bonds with write-down clauses. This effect is more pronounced for bonds issued by small banks, and banks in regions with weaker local fiscal strength. A higher proportion of CoCo bond in the bank capital increase the risk-taking of small banks. CoCo bond issuance reduces the spread of Negotiable Certificates of Deposit (NCDs) after the event due to a stronger buffer effect. We underscore the role of bail-in event in imposing market discipline in an emerging economy like China.

Suggested Citation

  • Li, Shanshan & Gong, Di & Lu, Liping, 2024. "Bail-ins and market discipline: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 51-68.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pb:p:51-68
    DOI: 10.1016/j.iref.2024.04.019
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    More about this item

    Keywords

    Bail-in; Market discipline; CoCo bonds; Implicit guarantee;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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