Bail-in in the European Banking Union: A Close Reading of Article 27 of the Single Resolution Mechanism Regulation

91 Pages Posted: 2 Mar 2022

See all articles by Christos Hadjiemmanuil

Christos Hadjiemmanuil

London School of Economics & Political Science (LSE); University of Piraeus

Date Written: February 25, 2022

Abstract

Conceived in the wake of the Global Financial Crisis, bail-in is the principal innovation of recent times in the area of bank crisis management. Bail-in enables a country’s banking authorities to force a failing bank’s immediate claimholders (specifically, its shareholders and certain, but not all, creditors) to contribute to the financial cost of its restructuring and return to viability through a write-down or conversion into common equity of their claims. Bail-in is thus designed to provide a solution to the problem of resolution financing. At the same time, it is supposed to preserve market discipline by abolishing the public subsidy that banks’ stakeholders enjoyed in the past as a result of taxpayer-funded bailouts. In the EU, bail-in has been adopted as one of the four resolution ‘tools’ (that is, restructuring methods) that the banking authorities of the Member States can apply for the resolution of failing banks in accordance to the Bank Recovery and Resolution Directive (BRRD). For the majority of Member States belonging to the euro area and its Banking Union, however, an adaptation of the BRRD’s provisions on bail-in to the peculiar, multilevel administrative realities of the Single Resolution Mechanism was necessary. This took the form of Article 27 of the Single Resolution Mechanism Regulation (SRMR). Article 27 is the SRMR’s longest, and arguably most contentious, provision. The present text contains a detailed analysis of the legislative text. In particular, it elucidates the conditions of application of the bail-in tool, the manner in which it is applied, the scope of liabilities amenable to bail-in, and the relationship of bail-in to the overall financing of a failing bank’s restructuring.

Keywords: Banking Union, SRM, SRB, SRF, ESM, bank resolution, bail-in

JEL Classification: G01, G18, G21, G28, G33, G38, H81, K22, K23

Suggested Citation

Hadjiemmanuil, Christos, Bail-in in the European Banking Union: A Close Reading of Article 27 of the Single Resolution Mechanism Regulation (February 25, 2022). European Banking Institute Working Paper Series 2022 - no. 116, Available at SSRN: https://ssrn.com/abstract=4047044 or http://dx.doi.org/10.2139/ssrn.4047044

Christos Hadjiemmanuil (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

University of Piraeus ( email )

Karaoli and Dimitriou 80
80 KARAOLI & DIMITRIOU STREET
Piraeus, Attiki 18534
Greece

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