Bank Crises: Continuing the Business, Protecting Investors

The economic and regulatory environment in which banking crises are handled has changed faster than the financial structure of the banks. In various countries, many shareholders and bondholders, including subordinate bondholders, are the bank's clients (including retail clients, often due to misselling). According to the new rules, investors should bear the cost of a bank's crisis, but their status as clients has made the prospect of successful bail-ins politically and factually very remote. Italy is no exception. This may generate pressure to escape from the new rules, on the one hand, and to resort to State aid, on the other. Given the current situation of overcapacity and the need to cut the number of banking branches, continuing the business of a bank that was resolved or liquidated via a sale of the business is motivated by the need to preserve financial stability, rather than by the goal of preserving value. Investors are compensated "ex post" through public schemes that bail-out subordinated bondholders (and, recently, even shareholders) from the consequences of burden sharing. A long and difficult transition will probably take place, a transition during which banks, and Italian banks in particular, will have to modify their liability structure, substituting bonds once sold to Italian families with costlier debt, to be financed through a low-margin banking business.