Critical Reflections on Bank Bail-ins

Emilios Avgouleas and Charles Goodhart

Journal of Financial Regulation, 2015, vol. 1, issue 1, 3-29

Abstract: Many of the world’s developed economies have introduced, or are planning to introduce, bank bail-in regimes that involve the participation of bank creditors in bearing the costs of restoring a failing bank to health. There is a long list of actual or hypothetical advantages attached to the bail-in process. Therefore, there is a need for a closer examination of the bail-in process, if it is to become a successful substitute to the unpopular bailout approach. The bail-in tool involves replacing the implicit public guarantee, on which fractional reserve banking has operated, with a system of private penalties. The bail-in approach may, indeed, be much superior to bailouts in the case of idiosyncratic failure. In other cases, the bail-in process may entail important risks. The article provides a legal and economic analysis of some of the key potential risks bail-ins may entail both in the domestic and cross-border contexts. It explains why bail-in regimes will not eradicate the need for injection of public funds where there is a threat of systemic collapse, because a number of banks have simultaneously entered into difficulties, or in the event of the failure of a large complex cross-border bank, unless the failure was clearly idiosyncratic.

Keywords: Bank failures; Bank bail-ins; bailouts; BRRD; Orderly Liquidation Authority; Dodd Frank; Single Point of Entry (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (39)

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