Bocconi University, Max Planck Institute and ECGI
O Tell Me The Truth About Bail-In : Theory and Practice
This Article analyzes the functioning of the European regulatory approach to the crisis of credit institutions, in the framework of EU banking supervision and in light of its early applications, with a special focus on bail-in. We investigate how the new resolution mechanisms — rooted in the principle of private sector involvement in banking restructurings — have inter-played with legal and institutional contexts still characterized by an attitude to bail-out rescues and by non-harmonized national insolvency rules. We show how and well-experimented restructuring tools have influenced the application of the new ones and, in many cases, have emphasized the defects, pitfalls and inconsistencies of the new regime, suggesting paths for reform.
The Article is organized as follows. Part II sets out a summary of the common regime applicable to credit institutions within the EU, based on harmonized requirements for capital and liquidity. Part III focuses on the pre-crisis and crisis tools, as spelled out in the Bank Recovery and Resolution Directive (“BRRD”), in coordination with bordering regulatory areas, such as the regimes applicable to the liquidation of insolvent banks and State aids in the context of banking rescues.
After a brief comparison with the US system (Part IV), we dwell, in Part V, on the practice of restructurings, before and after the BRRD. We specifically discuss two cases (the resolution of Banco Popular Español and the liquidation of Italian “Banche Venete”) that, in our view, illustrate very well the pros and cons of the new regime. Part VI concludes offering some suggestions for possible reform.
Love and Bail-in have little in common besides their largely unpredictable, incognizable and ineffable nature captured by the unanswered questions raised by WH Auden in the last stanza of his poem transcribed in the epigram. For regulators, banks, investors and practitioners, but more generally for society, however, a critical understanding of bail-in can be no less important, if less romantic, than of the causes and consequences of deep feelings. To recognize the risks and negative effects of unhealthy relationships might be particularly relevant both emotionally and practically, and their complexity and baffling mechanics should not impede an assessment of what is not working and should be changed. After all, in the same ballad, the Poet also wonders whether Love «Has it views of its own about money?», something that bail-in certainly has, as thousands of investors have unexpectedly discovered to their chagrin in the last few years, in Europe and elsewhere.
While the parallel we are drawing might seem forced, we believe that legislators, regulators and many scholars have fallen heads over hills with bail-in, with its possibly elegant but surely highly theoretical framework, underestimating its practical implications and what it needs to concretely and effectively operate. The reasons of this being enamored are different, more and less noble and pure, but as with all love affairs, after the first idyllic moments the practicalities become as important as the initial passion. This is not to say that we are pessimistic about the future of bank resolution based on the rationale of bail-in, but simply to underscore how the hasty and critical conditions in which it has been developed might have hazed and Electronic copy dazed a deeper understanding of its actual workings. The first few cases where the new regime applied, in the final phases of the great financial crisis commenced in 2007-2008, clearly show the many shortcomings of the new rules an suggest an understandable “escape” from bail-in.