Bail-in and Market Stabilization

The concept of “bailing in” a distressed bank’s creditors to avoid a taxpayer-financed public rescue is commonly accepted as one of the most significant regulatory achievements in the post-crisis efforts to end the problem of “Too Big To Fail”. Yet behind the political slogan, surprising uncertainties remain as to the precise regulatory objective of bail-in, as well as its trigger and the requirements for applying bail-in powers. Further, broad scepticism is voiced as to decisiveness of regulators to make use of their bail-in powers. In short, serious doubts persist as to the credibility of the concept, in particular relating to the fear that regulators may shy away from taking bail-in action in the decisive moment of rescue operations. Regulatory frameworks are ambivalent about the precise trigger requirements and substantial conditions for applying it. At the bottom of this vagueness is a surprising uncertainty about the policy purpose of bail-in.