Bail-in Provisions in State Aid and Resolution Procedures: Are they consistent with systemic stability?

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21 May 2014
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This CEPS Policy Brief examines the provisions for bail-in in the European Union – that is, the principle whereby any public measure to recapitalise a bank with insufficient prudential capital must be preceded by a write-down or conversion into equity of creditors’ claims – in state aid policies and in the new resolution framework for failing banks, with two aims:

i) to assess whether and how they are coordinated and

ii) more importantly, whether they address satisfactorily the question of systemic stability that may arise when investors fear that creditors’ claims are likely to be bailed-in in a bank crisis.

The issue is especially relevant in the present context, as the comprehensive assessment exercise underway for EU banks falling under the direct supervision of the European Central Bank may lead supervisors to require substantial capital injections simultaneously for many of the banks involved, possibly shaking investors’ confidence across EU banking markets.    
The authors conclude that the two sets of rules are, broadly speaking, mutually consistent and that they already contain sufficient safeguards to address systemic stability concerns. However, the balance of the elements underpinning the European Commission’s decisions in individual cases may not be clear to bank creditors and potential investors in financial markets. The impression of unneeded rigidity on this very sensitive issue has been heightened by official statements over-emphasising that each case will be assessed individually under competition rules, thus feeding the concern that the systemic dimension of the issue may have been underestimated. Therefore, further clarification by the Commission may be needed on how the various criteria will be applied during the ongoing transition to banking union – perhaps through a new communication completing the state aid framework for banks in view of the adoption of the new resolution rules.

Stefano Micossi is Director General of Assonime, Professor at the College of Europe and a member of the CEPS Board of Directors; Ginevra Bruzzone is Deputy Director General of Assonime; and Miriam Cassella is Legal Officer in Assonime Directorate for Competition and Regulation.

This paper was prepared for the conference on “Bearing the losses from bank and sovereign default in the Eurozone”, organised by Franklin Allen, Elena Carletti and Joanna Gray at the European University Institute, Villa Schifanoia, Florence, 24 April 2014.