Determinants of European Large Bank Ststock Market Volatility: Is There a Bail-In Effect?

In 2016 the “bail-in” tool, set by the European Bank Recovery and Resolution Directive (BRRD), started to enter into force: shareholders of European banks lose their money in the case of bank rescue. Instead, before the “bail-in” mechanism, governments often performed bail-out of distressed banks. The larger risk born by shareholders can be observed in the growth of the stock market volatility. We implement a panel data analysis on a sample of large European banks finding that in 2016 the stock market volatility changes in a way theoretically consistent with the introduction of the “bail-in”. Moreover, Italy shows an even larger volatility, probably due to retail investors owning bank shares, who could have understood the risk only after the burden sharing of four Italian banks in November 2015. These findings can be a warning about market efficiency, with implications for the systemic risk of a “bail-in” procedure.