During the recent financial crisis, resolution mechanisms proved to be
insufficient to wind down systemically important financial institutions.
Especially the bankruptcy of Lehman Brothers led to severe macroeconomic
instability. Afterwards, national and supranational authorities
implemented new regulations for preventing and managing bank failures,
among them the Single Resolution Mechanism (SRM) in the European Banking
Union. The failure of Banco Popular in June 2017 put the SRM to the
first test. As the resolution mechanism apparently worked smoothly, and
did not contaminate other banks or even the non-banking industry, the
question arises whether the resolution mechanism has consequently become
more credible for bank investors. By analyzing market reactions to the
Banco Popular bail-in, the author primarily aims to answer this
question. Hypothetically, if investors perceive the bail-in as a
credible commitment by the Single Resolution Board, the implicit
insurance should cease. For this reason, investors would demand higher,
risk-reflecting interest rates, impairing the bank's profitability.
Therefore, in the case that this is the dominant effect, a bank's share
price should fall. In this book: - Single Resolution Mechanism; -
European Banking Union; - financial industry regulations; - bail-in and
bail-out; - too big to fail banks; - Banco Popular