Who Should Hold Bail-Inable Debt and How can Regulators Police Holding Restrictions Effectively?

SAFE Working Paper No. 379

Rivista Italiana di Diritto Pubblico Comunitario, 1/2023, 92-118

21 Pages Posted: 30 Jan 2023 Last revised: 11 Dec 2023

See all articles by Irene Mecatti

Irene Mecatti

Law Department- Siena University; European Banking Institute

Tobias H. Troeger

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt - Faculty of Law; European Corporate Governance Institute (ECGI)

Date Written: January 30, 2023

Abstract

This paper analyses the demand-side prerequisites for the efficient application of the bail-in tool in bank resolution, scrutinises whether the European bank crisis management and deposit insurance (CMDI) framework is apt to establish them, and proposes amendments to remedy identified shortcomings.

The first applications of the new European CMDI framework, particularly in Italy, have shown that a bail-in of debt holders is especially problematic if they are households or other types of retail investors. Such debt holders may be unable to bear losses, and the social implications of bailing them in may create incentives for decision makers to refrain from involving them in bank resolution. In turn, however, if investors can expect resolution authorities (RAs) to behave inconsistently over time and bail-out bank capital and debt holders despite earlier vows to involve them in bank rescues, the pricing and monitoring incentives that the crisis management framework seeks to invigorate would vanish. As a result, market discipline would be suboptimal and moral hazard would persist. Therefore, the policy objectives of the CMDI framework will only be achieved if critical bail-in capital is not held by retail investors without sufficient loss-bearing capacity. Currently, neither the CMDI framework nor capital market regulation suffice to assure that this precondition is met. Therefore, some amendments are necessary. In particular, debt instruments that are most likely to absorb losses in resolution should have a high minimum denomination and banks should not be allowed to self-place such securities.

JEL Classification: 01, G18, G21, G28, K22, K23

Suggested Citation

Mecatti, Irene and Tröger, Tobias Hans, Who Should Hold Bail-Inable Debt and How can Regulators Police Holding Restrictions Effectively? (January 30, 2023). SAFE Working Paper No. 379, Rivista Italiana di Diritto Pubblico Comunitario, 1/2023, 92-118, Available at SSRN: https://ssrn.com/abstract=4342444 or http://dx.doi.org/10.2139/ssrn.4342444

Irene Mecatti

Law Department- Siena University ( email )

Via Mattioli 10
Siena, 53100
Italy
53100 (Fax)

HOME PAGE: http://https://docenti.unisi.it/en/mecatti

European Banking Institute ( email )

c/o TechQuartier, Platz d. Einheit 2,
https://ebi-europa.eu/
Frankfurt, DE 60327
Germany

HOME PAGE: http://https://ebi-europa.eu/

Tobias Hans Tröger (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

HOME PAGE: http://bit.ly/3dQ93nd

Goethe University Frankfurt - Faculty of Law ( email )

Theodor-W.-Adorno-Platz 3 (Westend Campus)
Frankfurt, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

HOME PAGE: http://www.jura.uni-frankfurt.de/43940696/English-Version

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.global/users/tobias-tr%C3%B6ger

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