Bank resolutions and specifically bail-ins are among the most complicated and contentious issues of banking law, in the EU and elsewhere. Bearing the potential to directly affect thousands of investors, and limiting the flexibility of Member States to rescue banks, they have stirred controversies well beyond the regulatory, scholarly and business circles, and have attracted the interest – and sometimes fueled the anger – of the public.
The first applications of the Bank Recovery and Resolution Directive (“BRRD”) have demonstrated the reluctance of European policy makers and regulators to use the bail-in tool (and, more generally, to fit into the resolution framework), due to the effects it can have on investors. In light of the experience gained with the BRRD in the last few years, the time is ripe for a discussion of the legal framework, an empirical analysis of the most important cases (which fills a gap in the existing literature, mostly concerned with the theoretical aspects of the resolution regime), and some proposals for reform.
The main argument we develop in our work is that regulators and many scholars have shown too much enthusiasm with the new rules (and, especially, the bail-in procedure), underestimating their practical implications and forgetting some intuitive fairness considerations – such as the retroactive application of the new rule toward investors – that have dramatically demonstrated their importance.
More specifically, we find that several ‘endogenous’ and ‘exogenous’ factors have eroded the foundations of an elegant but abstract legal framework, and altered the functioning of the bail-in. By ‘endogenous’ factors, we mean intrinsic flaws or shortcomings of the resolution rules, which end up weakening (if not contradicting) its policy ends. By ‘exogenous’ factors, we mean other sets of rules (such as the EU State aid rules and the national rules on the liquidation of insolvent banks), or factual circumstances (such as the health of the banking industry) that have critically interplayed with the BRRD.
In suggesting some corrections to the EU resolution framework, the core of our proposal revolves around four ideas: (1) A clarification of the concept of ‘public interest’ relevant for both the adoption of resolution tools and the granting of State aids; (2) Uniforming those aspects of national insolvency and liquidation rules that might facilitate the adoption of the resolution decisions; (3) A more flexible write-down requirement; (4) Greater transparency and better timing for resolution decisions.