Necessary but Not Sufficient: Stay Upon Resolution via Bail-In

Abstract

The bail-in tool for the resolution of failing banks depends critically on suspending the right of counterparties to terminate qualified financial contracts (QFCs) such as derivatives and repos. In theory, the stay provides the resolution authority with the time necessary to recapitalise and stabilise the failing bank, so that the bank in resolution can operate “normally” upon reopening.

In practice, the stay is likely to be insufficient. It is neither unconditional, nor uniform, nor comprehensive. Above all, it is temporary. Upon reopening, counterparties are likely to refuse to roll over maturing obligations as well as demand additional collateral for QFCs that remain outstanding. Policymakers must therefore ensure that the bank-in-resolution has access to adequate liquidity upon reopening.

Keywords: Banking, resolution, bail-in, stay upon resolution

JEL Classification: G21, G28