The financial crisis of 2008-09 and the ensuing sovereign debt and banking crises within the Eurozone exposed the presence of a massive moral hazard within the banking systems. They led to a regulatory response that culminated in the creation of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). In order to reduce public support to banks, the Banking Communications and the Bank Recovery and Resolution Directive introduced the burden-sharing and bail-in tools, putting the burden of bank rescue on shareholders and subordinated creditors while minimising the burden on taxpayers. In the light of this general framework, this paper surveys five Italian cases of recovery or resolution of distressed banks during the last five years, to test the flexibility and effectiveness of the EU rules. In Italy, the application of the bail-in was avoided while the application of burden sharing raised specific challenges because of the large amount of subordinated debt held by households. This challenge has been addressed, since the very beginning, by means of compensation tools aiming at remedying specific cases of mis-selling to retail investors. However, while initially this was done under narrow conditions, the broader provisions in the Budget Law for 2019, if resulting in blanket compensation for losses to bondholders (95%) and even to shareholders (30%), would be in clear violation of EU rules.

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