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

Journal of Financial Regulation, Vol. 4, Issue 1

SAFE Working Paper No. 179

European Banking Institute Working Paper No. 12

41 Pages Posted: 23 Aug 2017 Last revised: 7 Feb 2018

See all articles by Tobias H. Troeger

Tobias H. Troeger

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt - Faculty of Law; European Corporate Governance Institute (ECGI)

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

Tröger, Tobias Hans, Too Complex to Work: A Critical Assessment of the Bail-In Tool Under the European Bank Recovery and Resolution Regime (August 20, 2017). Journal of Financial Regulation, Vol. 4, Issue 1 , SAFE Working Paper No. 179, European Banking Institute Working Paper No. 12, Available at SSRN: https://ssrn.com/abstract=3023184 or http://dx.doi.org/10.2139/ssrn.3023184

Tobias Hans Tröger (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
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HOME PAGE: http://bit.ly/3dQ93nd

Goethe University Frankfurt - Faculty of Law ( email )

Theodor-W.-Adorno-Platz 3 (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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.global/users/tobias-tr%C3%B6ger

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