The Impact of Government Interventions and Regulatory Reform on Bailout Expectations in the EU
I investigate the implications of government interventions and regulatory reform on too-big-too-fail expectations of European banks. Evidence using market returns over the 1993 to 2016 period suggests that large European banks have benefitted and to a certain extent continue to benefit from implicit government guarantees. I document that too-big-to-fail expectations are consistently priced in stocks returns and result in significantly lower cost of capital for large European banks. Importantly, too-big-to-fail expectations persist throughout the financial and sovereign debt crisis. Preliminary evidence furthermore suggests the continued existence of implicit government guarantees in the post-sovereign debt period after the Single Resolution Mechanism has been introduced.