Policy Briefs

G. Toniolo – Bail-in: Useful in normal times, risky in a crisis

“BAIL-IN”: a new word has recently entered the public consciousness, one that is not yet present in Merriam-Webster. In Italy, the crisis of four small banks has introduced the new European banking “resolution” regime (SRM) to many who would otherwise have never paid attention to the issue. So, now we know what it is, but what are the pros and cons of the new regime that, on the heels of the Single Supervisory Mechanism (SSM), makes up the second building block of the Banking Union (while we are still missing the third—a single deposit guarantee scheme)?

The main objectives of the Single Resolution Mechanism (SRM) are: to enhance trust in the banking sector, prevent bank runs and contagion, minimize (decouple) the dangerous link between banks and sovereign debt, and reduce the fragmentation in the internal market for financial services.

Are these objectives conducive to economic growth and stability? There are good arguments for saying the new regime could be useful in “normal times.” A significant portion of shareholders, bondholders, and depositors, all holding assets with credit institutions, would need to be more careful in risk-taking, knowing that the government will not be on standby to bail them out. Economists rightly assume that closer attention paid by shareholders, bondholders and depositors to bank management could result in a stronger and more stable banking system. With normal-sized waves (perfect calm is a rare occurrence), the new regime, if well-managed, could fill the ship’s sails, allowing for swifter and more tranquil navigation while giving the crew time to prepare the vessel for the inevitable storm.

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