The bail-in credibility: barking dogs seldom bite

This paper studies the senior unsecured bondholders’ bail-in expectations and market monitoring following bail-in legislative events aimed at introducing new tools for subordination. We measure bail-in expectations using a difference in differences approach that compares the reaction to bail-in events of senior unsecured bonds to the reaction of non-bailinable bonds. Similarly, we measure senior unsecured bondholders’ monitoring activity by using a triple differencing analysis that compares the yield-risk sensitivity reaction of senior unsecured bonds with respect to that of non-bailinable bonds. Our results indicate unaffected bail-in expectations by senior unsecured bondholders who, accordingly, do not enhance their pricing of banks’ risk.