Will Bust Banks Be Born Again by Bail-In?

Butterworths Journal of International Banking and Financial Law, April 2019

4 Pages Posted: 7 Jun 2019

See all articles by Thomas Huertas

Thomas Huertas

Goethe University Frankfurt - Institute of Law and Finance; Center for Financial Studies

Date Written: April 10, 2019

Abstract

Resolution may begin with bail-in. But it does not end there. Resolution only ends when the bank is fully born again, i.e. when the resolution authority ceases to control the bank and the bank returns to normal governance and supervision. How that should happen has received relatively little attention. Yet these details matter greatly, for they determine how attractive investors will find the gone-concern capital instruments upon which bail-in and therefore resolution critically depend.

If a bank reaches the point of non-viability, the outcome for investors in gone-concern capital instruments (capital that absorbs losses on the bank’s entry into resolution) can vary from complete loss to complete recovery depending primarily on the decisions the resolution authorities take. This dispersion results from uncertainty concerning the point at which the authorities put a failing bank into resolution, their choice of resolution method, the terms on which authorities bail in liabilities and the process by which the authorities end resolution and return control to investors. Investors may therefore find it difficult to estimate loss given resolution, especially for instruments convertible into CET1 capital. Consequently, if investors in gone concern capital wish to preserve value in their investments, the time for them to take action is before the bank enters resolution.

Keywords: banks, banking, resolution, capital, gone-concern capital, bail-in

JEL Classification: G18, G21,G28, G33, G38, K21, K22

Suggested Citation

Huertas, Thomas, Will Bust Banks Be Born Again by Bail-In? (April 10, 2019). Butterworths Journal of International Banking and Financial Law, April 2019. Available at SSRN: https://ssrn.com/abstract=3389276

Thomas Huertas (Contact Author)

Goethe University Frankfurt - Institute of Law and Finance ( email )

Campus Westend - Grüneburgplatz 1
Frankfurt, 60323
Germany

Center for Financial Studies ( email )

Grüneburgplatz 1
Goethe University
Frankfurt am Main, 60323
Germany

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