Bank Bail-In and Disputed Claims: Can It Cope? The Case for and against a Vis Attractiva Resolutionis

Abstract

Within the Banking Union and the European Union as a whole, the so-called Bail-in of liabilities has come to be accepted as probably the core element of the new harmonised toolbox for the resolution of systemic bank insolvencies. While the recent debate has focused on the economic conditions that must be fulfilled if the tool can be relied upon in future cases, the present paper examines yet another aspect of the instrumentarium, namely the treatment of disputed claims in bail-ins: claims owed by or to the institution in resolution, whose existence and/or dimension is subject to controversy or even subject to litigation between the institution and the relevant counterparty. The paper argues that disputed liabilities – especially in the case of large claims – inevitably will have an impact on the calibration of the bail-in tool, and examines how the resulting problems are addressed under the BRRD and the SRM Regulation. It is argued that – in contrast to traditional insolvency procedures, which are designed to facilitate a comprehensive resolution of distributional conflicts between an insolvent debtor and its counterparties – bank resolution does offer no such mechanism. Specifically, disputed claims cannot adequately resolved within the valuation and calibration procedure, given the special nature of resolution as an instrument to protect the public interest in the preservation of financial stability and the protection of public budgets. This insight lends further support to the notion that the application of the Bail-in tool should be reserved to predefined, designated bailinable instruments.

JEL Classification: G20, G21, G33, K22, K23, K29