Free market in death? Europe’s new bail-in regime and its impact on bank funding

With the Single Resolution Mechanism taking full effect in 2016, winding-up large European banks in distress has become a more realistic scenario than ever before. One of the key elements of such a resolution is the bail-in tool. It is supposed to ensure that for investors, higher returns also involve higher risk, thereby establishing greater discipline and differentiation in markets for bank debt.

An analysis by Deutsche Bank showed that market participants see the new bail-in regime as credible, which is a necessary precondition for a successful application. Important issues that still remain are the market depth for bail-in instruments and legal clarity about bail-in hierarchies. In any case, banks’ funding costs are likely to rise as a result, especially in the medium term.

European Central Bank: Banking supervision: Banking union http://www.europeansources.info/record/banking-supervision/

ESO: Background information: Europe's Too-Big-to-Fail Banks Remain Risky http://www.europeansources.info/record/europes-too-big-to-fail-banks-remain-risky/

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