The Dark Side of Bank Resolution: Counterparty Risk through Bail-in

53 Pages Posted: 11 Jan 2019

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)

Jatine Patel

University of Hamburg - Institute of Law and Economics; University of Oxford; Australian National University (ANU)

Date Written: January 11, 2019

Abstract

The introduction of bail-in resolution powers to impose the costs of a large bank’s failure on its creditors (rather than on the taxpayer) is the most enthralling initiative of the post-financial crisis regulatory framework. However, one important conundrum remains in the elaborate bail-in regime: it is unclear who is best qualified to hold bank capital that is subject to bail-in. This paper argues that such regulatory agnosticism as to the ideal counterparty of bail-inable debt is subverting the new bail-in tool altogether, verily inducing banking capital investors to counterproductively choose outcomes that further systemic risk. Using a difference-in-differences methodology, we provide evidence from the introduction of bail-in powers at the Eurozone level, confirming that it has led to a growing interconnectedness of banks. We then discuss the regulatory challenges of addressing the problem of banking capital counterparties and develop Coasian-style principles that may improve the current framework. This article builds upon the literature by providing an analysis of the interaction between banking capital counterparties and bail-in; identifying a significant gap in the regulatory framework; and explaining why Coasian, as opposed to prescriptive, regulatory measures are necessary.

Keywords: bail-in, bank resolution, interconnectedness, systemic risk, Eurozone

JEL Classification: G21,G28,G33

Suggested Citation

Ringe, Wolf-Georg and Patel, Jatine, The Dark Side of Bank Resolution: Counterparty Risk through Bail-in (January 11, 2019). European Banking Institute Working Paper Series 2019 – no. 31; Oxford Legal Studies Research Paper. Available at SSRN: https://ssrn.com/abstract=3314103 or http://dx.doi.org/10.2139/ssrn.3314103

Wolf-Georg Ringe (Contact Author)

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

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+49 40 42838 6794 (Fax)

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

University of Oxford - Faculty of Law

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

European Corporate Governance Institute (ECGI) ( email )

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Belgium

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

Jatine Patel

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

Johnsallee 35
Hamburg, 20148
Germany

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

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