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Too Complex to Work: A Critical Assessment of the Bail-In Tool Under the European Bank Recovery and Resolution Regime

38 Pages Posted: 23 Aug 2017 Last revised: 19 Sep 2017

Tobias H. Troeger

Goethe University Frankfurt - Faculty of Law; Goethe University Frankfurt - Research Center SAFE; European Banking Institute

Date Written: August 20, 2017

Abstract

This paper analyzes 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. Moreover, the idea that nearly all positions on the liability side of a bank’s balance sheet should be subjected to bail-in is misguided. Instead, a concentration of PSI in instruments that fall under the minimum requirements for own funds and eligible liabilities (MREL) is preferable. Finally, this paper synthesized the prior analysis by putting forward an alter-native regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible form the resolution process as such.

Keywords: bail-in, private sector involvement, precautionary recapitalization, cross-border insolvency, market discipline

JEL Classification: G01, G18, G21, G28, K22, K23

Suggested Citation

Troeger, Tobias H., Too Complex to Work: A Critical Assessment of the Bail-In Tool Under the European Bank Recovery and Resolution Regime (August 20, 2017). SAFE Working Paper No. 179; European Banking Institute Working Paper Series 12. Available at SSRN: https://ssrn.com/abstract=3023184

Tobias Hans Tröger (Contact Author)

Goethe University Frankfurt - Faculty of Law ( email )

Grüneburgplatz 1 (Westend Campus)
Frankfurt, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

HOME PAGE: http://www.jura.uni-frankfurt.de/43940696/English-Version

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://safe-frankfurt.de/research/all-researchers/researchers-details/showauthor/prof-dr-tobias-troe

European Banking Institute ( email )

Frankfurt
Germany

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