Fine-Tuning the Use of Bail-In to Promote a Stronger EU Financial System

CEPS Special Report, No. 136, 2016

20 Pages Posted: 21 May 2016

See all articles by Stefano Micossi

Stefano Micossi

Associazione italiana delle società per azioni

Ginevra Bruzzone

ASSONIME

Miriam Cassella

ASSONIME

Date Written: April 21, 2016

Abstract

This paper discusses the application of the new European rules for burden-sharing and bail-in in the banking sector, in view of their ability to accommodate broader policy goals of aggregate financial stability. It finds that the Treaty principles and the new discipline of state aid and the restructuring of banks provide a solid framework for combating moral hazard and removing incentives that encourage excessive risk-taking by bankers. However, the application of the new rules may have become excessively attentive to the case-by-case evaluation of individual institutions, while perhaps losing sight of the aggregate policy needs of the banking system. Indeed, in this first phase of the banking union, while large segments of the EU banking sector still require a substantial restructuring and recapitalisation, the market may not be able to provide all the needed resources in the current environment of depressed profitability and low growth. Thus, a systemic market failure may be making the problem impossible to fix without resorting to temporary public support. But the risk of large write-offs of capital instruments due to burden-sharing and bail-in may represent an insurmountable obstacle to such public support as it may set in motion an investors’ flight. The paper concludes by showing that existing rules do contain the flexibility required to accommodate aggregate policy requirements in the general interest, and outlines a public support scheme for the precautionary recapitalisation of solvent banks that would be compliant with EU law.

Keywords: EU banking sector, EU, EU financial system, bail-in, burden-sharing, banking

Suggested Citation

Micossi, Stefano and Bruzzone, Ginevra and Cassella, Miriam, Fine-Tuning the Use of Bail-In to Promote a Stronger EU Financial System (April 21, 2016). CEPS Special Report, No. 136, 2016, Available at SSRN: https://ssrn.com/abstract=2782371

Stefano Micossi (Contact Author)

Associazione italiana delle società per azioni ( email )

Piazza Venezia 11
ROMA, 00187
Italy
+39 06 69529214 (Phone)

Ginevra Bruzzone

ASSONIME ( email )

Piazza Venezia 11
ROMA, 00187
Italy

Miriam Cassella

ASSONIME ( email )

Piazza Venezia 11
ROMA, 00187
Italy

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