Bank Stakeholders' Mandatory Contribution to Resolution Financing: Principle and Ambiguities of Bail-In
ECB Legal Conference 2015: From Monetary Union to Banking Union, on the Way to Capital Markets Union, New Opportunities for European Integration (Frankfurt am Main: European Central Bank, December 2015), pp 225-248
22 Pages Posted: 1 Mar 2016 Last revised: 2 Mar 2016
Date Written: December 20, 2015
In response to the Global Financial Crisis, many countries have established special resolution regimes (SRRs) for failed banks. Common standards for SRRs have been developed by the Basel Committee on Banking Supervision (‘BCBS’) and, primarily, by the Financial Stability Board (‘FSB’). In the EU, a harmonized framework for the recovery and resolution of weak or failed banks was adopted in 2014 in the form of the Bank Recovery and Resolution Directive (‘BRRD’). Based on a purely administrative approach, SRRs largely exclude courts from the resolution process. Instead, SRRs vest on specialist bodies (resolution authorities) a wide array of administrative powers and define a set of very potent resolution ‘tools’ (that is, restructuring techniques), enabling a continuation of the operations of the failed bank (although not always its survival as a legal person).
The resolution tools include the so-called “bail-in” tool, which empowers the resolution authorities to force a failing or failed bank’s immediate stakeholders (specifically, its shareholders and certain, but not all, creditors) to contribute to the financial cost of resolution through a write down or conversion of their claims against the bank. Bail-in constitutes a critical innovation of the post-crisis regulatory regime. It is designed to provide an innovative and drastic response to the problem of resolution financing. At the same time, it is meant to strengthen market discipline by abolishing the public subsidy that banks’ stakeholders enjoyed in the past as a result of bailouts.
Following a brief account of the emergence of SRRs for failed banks in the wake of the crisis (section 1) and, in particular, of the adoption and key elements of EU’s BRRD (section 2), the present paper focuses on the place of bail-in in the new regime. In particular, the paper discusses certain fundamental aspects of the bail-in tool, namely: the underlying philosophy of bail-in and its relation to standard theories of insolvency law (section 3); the limited and potentially discretionary scope of bail-in as operationalized in the BRRD (section 4); the tension between the bail-in tool and the protection of stakeholders’ rights in accordance with general principles of insolvency law (section 5); and the implausibility of the claim that bail-in will relegate discretionary bank bailouts to the ash heap of history, as some people seem to think (section 6).
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