Bail-in: a regulatory critique

Abstract

This short article discusses some of the legal and market risks in using the bail-in resolution tool, as it is defined and applied in the EU Bank Recovery and Resolution Directive. The BRRD’s bail-in tool provides resolution authorities with wide discretion to impose losses on the creditors and shareholders of a distressed bank while it is a going concern. The article argues that the rules governing when and how resolution authorities can use the bail-in tool are vague and provide inadequate guidance for market participants. The bail-in tool represents an ad hoc regulatory measure that undermines market confidence and potentially infringes on fundamental property rights under EU and ECHR jurisprudence.