International Coordination in Cross-Border Bank Bail-Ins: Problems and Prospects
35 Pages Posted: 24 Jan 2017 Last revised: 13 Jul 2018
Date Written: June 1, 2015
Bail-in is quickly becoming a predominant approach to banking resolution. The EU Bank Recovery Resolution Directive and the US Federal Deposit Insurance Corporation’s single point of entry strategy envisage creditors’ recapitalisations to resolve a failing financial institution. However, this legislation focuses on the domestic aspects of bail-in, leaving the question of how it is applied to a cross-border banking group open. Cross-border banking resolution has been historically subject to coordination failures, which have resulted in disorderly resolutions with dangerous systemic effects.
The goal of this article is to assess whether bail-in is subject to the same coordination problems that affect other resolution tools, and to discuss the logic of international legal cooperation in bail-in policies. We demonstrate that, in spite of the evident benefit in terms of fiscal sustainability, bail-in suffers from complex coordination problems which, if not addressed, might lead to regulatory arbitrage and lengthy court battles, and, ultimately, may disrupt resolutions. We argue that only a binding legal regime can address those problems. In doing so, we discuss the recent Financial Stability Board’s proposal on cross-border recognition of resolution action, and the role of international law in promoting cooperation in banking resolution.
Keywords: Bail-in, Resolution, Bailout, Cross-border bank supervision, Bankruptcy, Regulatory arbitrage
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