Bail-in: who invests in noncovered debt securities issued by euro area banks?

During the financial crisis numerous banks experienced financial difficulties and were subsequently bailed out by governments using taxpayers’ money. Policymakers around the globe responded by overhauling resolution mechanisms for banks, including the introduction of bail-in rules to prevent future taxpayer-funded bail-outs. Despite the initial optimism that bail-in would mitigate the too-big-to-fail dilemma, criticism highlighting the shortcomings of this approach has recently been voiced both in academia and in wider circles. Several researchers have noted the urgent need for a more detailed analysis of the structure of holdings of bail-in-able debt securities. The aim of this paper is twofold: First, we provide an overview of the main arguments for and against the bail-in tool, and second, we shed light on the question of who invests in senior unsecured debt securities issued by banks, drawing on the Securities Holdings Statistics of the ECB for evidence. Our empirical evaluation on the basis of unconsolidated national banking sectors in the euro area provides information on the structure of the demand and supply side of bail-in-able bank debt securities in each euro area country. We are able to show which portions of the outstanding bail-in-able bank debt securities issued by euro area banks on aggregate and in individual countries are held in which region (home country, non-home euro area and outside the euro area) and by which sector (i.e. banks, other financial institutions and nonfinancial sector) within the euro area. In particular, we find that nearly 40% of all bail-in-able debt securities issued by euro area banks are held outside the euro area; intra-euro area cross-border holdings account for one-third of all euro area holdings of such debt, euro area banks’ holdings for one-third and the euro area’s nonfinancial sector (mainly households) for one-fourth. As regards bail-in-able debt issued by Austrian banks, about 20% are held outside the euro area, while euro area banks hold about 36% and the euro area’s nonfinancial sector about 38% of all euro area holdings of this debt.