Bail-ins and market discipline: Evidence from China

We examine the effect of bail-in event on the market discipline for Chinese banks, exploiting the bankruptcy of Baoshang Bank and subsequent write-down as a quasi-natural experiment. Using the bond data of banks from 2016 to 2021, we find that the bail-in event leads to higher issuance spreads for bonds with write-down clauses. This effect is more pronounced for bonds issued by small banks, and banks in regions with weaker local fiscal strength. A higher proportion of CoCo bond in the bank capital increase the risk-taking of small banks. CoCo bond issuance reduces the spread of Negotiable Certificates of Deposit (NCDs) after the event due to a stronger buffer effect. We underscore the role of bail-in event in imposing market discipline in an emerging economy like China.