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Too complex to work: A critical assessment of the bail-in tool under the European bank recovery and resolution regime

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  • Tröger, Tobias H.

Abstract

This paper analyses the bail-in tool under the BRRD and predicts that it will not reach its policy objective. To make this argument, this paper first describes the policy rationale that calls for mandatory private sector involvement (PSI). From this analysis the key features for an effective bail-in tool can be derived. These insights serve as the background to make the case that the European resolution framework is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD's bail-in tool in the much broader resolution process which entails ample discretion of the authorities also in forcing private sector involvement. Finally, this paper synthesized the prior analysis by putting forward an alternative regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible from the resolution process as such.

Suggested Citation

  • Tröger, Tobias H., 2017. "Too complex to work: A critical assessment of the bail-in tool under the European bank recovery and resolution regime," SAFE Working Paper Series 179, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:179
    DOI: 10.2139/ssrn.3023184
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    Cited by:

    1. Schularick, Moritz & Steffen, Sascha & Tröger, Tobias, 2020. "Bank capital and the European recovery from the COVID-19 crisis," SAFE White Paper Series 69, Leibniz Institute for Financial Research SAFE.
    2. Giulio Velliscig & Maurizio Polato & Josanco Floreani & Enrica Bolognesi, 2024. "The bail-in credibility: barking dogs seldom bite," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(1), pages 1-19, March.
    3. Souza, Sergio Rubens Stancato de & Silva, Thiago Christiano & Almeida, Carlos Eduardo de, 2019. "Bailing in Banks: costs and benefits," Journal of Financial Stability, Elsevier, vol. 45(C).
    4. Meier, Samira & Rodriguez Gonzalez, Miguel & Kunze, Frederik, 2021. "The global financial crisis, the EMU sovereign debt crisis and international financial regulation: lessons from a systematic literature review," International Review of Law and Economics, Elsevier, vol. 65(C).
    5. Cutura, Jannic Alexander, 2018. "Debt holder monitoring and implicit guarantees: Did the BRRD improve market discipline?," SAFE Working Paper Series 232, Leibniz Institute for Financial Research SAFE.

    More about this item

    Keywords

    bail-in; private sector involvement; precautionary recapitalization; cross-border insolvency; market discipline;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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