Bail-In between Liquidity and Solvency

American Bankruptcy Law Journal, 2018, Forthcoming

Oxford Legal Studies Research Paper No 33/2016

40 Pages Posted: 25 May 2016 Last revised: 14 Oct 2017

See all articles by Wolf-Georg Ringe

Wolf-Georg Ringe

University of Hamburg - Institute of Law & Economics; University of Oxford - Faculty of Law; European Corporate Governance Institute (ECGI)

Date Written: January 18, 2017

Abstract

The concept of “bailing in” a distressed bank’s creditors to avoid a taxpayer-financed public rescue is commonly accepted as one of the most significant regulatory achievements in the post-crisis efforts to end the problem of “Too Big To Fail”. Yet behind the political slogan, surprising uncertainties remain as to the viability of the concept and its optimal legal design. This paper traces the development of the bail-in concept since it was first conceived in 2010 and demonstrates that it has undergone an important conceptual metamorphosis. Bail-in, first understood as fulfilling the “redistributory” purpose of sparing taxpayers from rescuing banks, has more recently been promoted as additionally serving a “market stabilizing” function: to stem a panic and to avoid run risks.

Whilst this trend is to be welcomed, it requires a number of changes to the present legal frameworks that are in place in many jurisdictions around the world. Issues to be addressed include, inter alia, to formulate appropriate criteria to trigger bail-in measures and to overcome a natural reluctance by resolution authorities to intervene and apply bail-in powers. This paper makes the case for early intervention triggers and demonstrates that liquidity provision by a lender of last resort during resolution is crucial to make bail-in credible. The paper places bail-in as a conceptual tool into the broader debate of how to deal with distressed banks and derives a number of concrete regulatory proposals.

Keywords: Bail-in, bailout, too big to fail, bank resolution, liquidity, solvency, lender of last resort

JEL Classification: E58, G28, K29

Suggested Citation

Ringe, Wolf-Georg, Bail-In between Liquidity and Solvency (January 18, 2017). American Bankruptcy Law Journal, 2018, Forthcoming; Oxford Legal Studies Research Paper No 33/2016. Available at SSRN: https://ssrn.com/abstract=2782457 or http://dx.doi.org/10.2139/ssrn.2782457

Wolf-Georg Ringe (Contact Author)

University of Hamburg - Institute of Law & Economics ( email )

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Hamburg, 20148
Germany
+49 40 42838 7787 (Phone)
+49 40 42838 6794 (Fax)

HOME PAGE: http://www.ile-hamburg.de

University of Oxford - Faculty of Law

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Oxford, OX1 3UL
United Kingdom

HOME PAGE: http://www.law.ox.ac.uk/people/wolf-georg-ringe

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://ecgi.global/users/wolf-georg-ringe

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