An anatomy of Bank Bail-ins: Why the Eurozone needs a fiscal backstop for the banking sector

Aimilios Avgouleas, Charles Goodhart

Research output: Contribution to journalArticlepeer-review

Abstract

Bail-ins could prove an effective way to replace the unpopular bail-outs. In the EU the doom-loop between bank and sovereign indebtedness leſt governments with a major conundrum. Thus, the EU resolution regime requires the prior participation of bank creditors in meeting the costs of bank recapitalisation before any form of public contribution is made. But, there is a danger of over-reliance on bail-ins. Bail-in regimes will not remove the need for public injection of funds, unless the risk is idiosyncratic. This suggestion raises concerns for banks in the periphery of the euro-area, which present very high levels of non-performing assets, crippling credit growth and economic recovery. To avoid pushing Eurozone banks with high NPL levels into bail-in centred recapitalisations, we have considered the benefits from and legal obstacles to the possible establishment of a euro-wide fund for NPLs that would enjoy an ESM guarantee. Long-term (capped) profit-loss sharing arrangements could bring the operation of the fund as close to a commercial operation as possible. Cleaning up bank balance sheets from NPLs would free up capital for new lending boosting economic recovery in the periphery of the Eurozone.
Original languageEnglish
Pages (from-to)75-90
Number of pages15
JournalEuropean Economy - Banks Regulation and the Real Sector
Volume2016
Issue number2
Early online date5 Dec 2016
Publication statusE-pub ahead of print - 5 Dec 2016

Keywords

  • Eurozone banks
  • non-performing loans (NPLs)
  • bailout
  • bail-in
  • BRRD
  • ESM
  • European Banking Union
  • Eurozone crisis
  • fiscal backstop

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