Bail-In and the Financing of Resolution within the SRM Framework

Abstract

The massive bail-outs of credit institutions carried out during the financial crisis have prompted policy reaction to avoid that the costs of private business failure be shifted onto taxpayers. To avert this, a credible threat coupled with effective sanctioning powers was needed. The bail-in tool, one of the instruments of the resolution toolkit, is the regulatory response to the problem of social costs. It consists in the write down and conversion of eligible liabilities to the level required to restore the bank’s viability. To make it effective, resolution authorities have been entrusted with sweeping powers to expropriate the relevant creditors. To maintain the resolution authorities’ action fair and proportionate, limitations have been set forth by contemplating the overarching safeguard of the ‘no creditor worse off’. State support measures have been maintained as a residual possibility to provide a public backstop where financial stability needs so require.

Keywords: Bail-in, bank resolution, State aid, property, NCWO