Towards an Optimal Composition of Bail-inable Debtholders?

Edoardo D. Martino (2021): Towards an optimal composition of bail-inable debtholders?, Journal of Corporate Law Studies, DOI: 10.1080/14735970.2021.1908808

45 Pages Posted: 7 Apr 2021

See all articles by Edoardo D. Martino

Edoardo D. Martino

University of Amsterdam; European Banking Institute

Date Written: April 2021

Abstract

The core insight of the new EU framework for bank resolution is to allocate losses to bank’s insiders (bail-inable creditors). This affects both financial stability and the corporate governance of banks. The current academic debate on bank resolution overlooks the relevance of identifying the investors in bail-inable securities (ie who is going to bear losses) and the role of counterparty risk. This article identifies the investors that are better suited to hold those instruments and highlights the trade-offs between the corporate governance role and the threat to financial stability posed by different investors. The article demonstrates that the composition of bail-inable debtholders matters and shows – empirically and theoretically – a transition towards a desirable composition of holders; although a considerable room for improvement remains. This exercise deepens the understanding of the impact of the resolution framework and the importance of counterparties for its credibility and future applications.

Keywords: Bail-in; corporate governance; financial stability; counterparties; institutional investors

JEL Classification: G21, G38, K22

Suggested Citation

Martino, Edoardo D., Towards an Optimal Composition of Bail-inable Debtholders? (April 2021). Edoardo D. Martino (2021): Towards an optimal composition of bail-inable debtholders?, Journal of Corporate Law Studies, DOI: 10.1080/14735970.2021.1908808, Available at SSRN: https://ssrn.com/abstract=3820752

Edoardo D. Martino (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
NE 1018 WB
Amsterdam, 1018 WB
Netherlands

European Banking Institute ( email )

Frankfurt
Germany

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