#2223. Have Too-Big-to-Fail Expectations Diminished? Evidence from the European Overnight Interbank Market

September 2026publication date
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Journal’s subject area:
Finance;
Accounting;
Economics and Econometrics;
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Abstract:
Using the Eurosystem’s proprietary interbank loan data from June 20XX–June 20XX, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for a large set of other factors but has decreased over time, especially in countries that were stricken by the Sovereign Debt Crisis. A difference-in-differences analysis suggests that the decline in the size premium is related to the actual bail-in events, not to the implementation dates of the Bank Recovery and Resolution Directive as such. This finding is robust to controlling for the effect of the ECB’s long-term refinancing operations. Overall, the results suggest that the regulatory move towards bail-in rather than bailout policies to deal with financially distressed banks has reduced the too-big-to-fail expectations concerning large banks.
Keywords:
Bail-in; Bailouts; Bank recovery and resolution directive; Implicit government guarantee; Interbank borrowing costs; Overnight rates; Too-big-to-fail

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