The global financial crisis and the ensuing Eurozone crisis proved catalytic for the reform of the EU’s financial regulatory and supervisory framework. One of the most important innovations of the Banking Union, EU’s flagship reform, was the adoption of the bail-in principle in the resolution of failing banks. The bail-in principle was introduced to eliminate publicly funded bailouts, break the link between banks and sovereigns and instil discipline in financial market participants. Although the adoption of bail-in as a resolution tool undoubtedly constitutes a step forward, it has its own limitations. In this chapter, we focus on the constraints imposed on bail-in implementation, by the political economy dynamics of banking crises, by examining in detail two such crises, in Cyprus and Italy. The analysis shows that both before and after the introduction of the new European resolution regime, bail-in requirements were not fully and equally implemented across all creditors, while public bailouts were not averted. Our tentative explanation for this result is that structural transformations such as globalization, securitization and financialization have complicated the resolution of banks by creating new interest constellations, which resist incurring the losses of bail-in. Accordingly, unless more radical reforms are introduced, banking crises will continue to disrupt financial stability and impose significant fiscal burdens on states.

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From Bailouts to Bail-Ins: Political Economy Constraints to Effective Crisis Resolution in the EU

  • Dimitris Katsikas

摘要

The global financial crisis and the ensuing Eurozone crisis proved catalytic for the reform of the EU’s financial regulatory and supervisory framework. One of the most important innovations of the Banking Union, EU’s flagship reform, was the adoption of the bail-in principle in the resolution of failing banks. The bail-in principle was introduced to eliminate publicly funded bailouts, break the link between banks and sovereigns and instil discipline in financial market participants. Although the adoption of bail-in as a resolution tool undoubtedly constitutes a step forward, it has its own limitations. In this chapter, we focus on the constraints imposed on bail-in implementation, by the political economy dynamics of banking crises, by examining in detail two such crises, in Cyprus and Italy. The analysis shows that both before and after the introduction of the new European resolution regime, bail-in requirements were not fully and equally implemented across all creditors, while public bailouts were not averted. Our tentative explanation for this result is that structural transformations such as globalization, securitization and financialization have complicated the resolution of banks by creating new interest constellations, which resist incurring the losses of bail-in. Accordingly, unless more radical reforms are introduced, banking crises will continue to disrupt financial stability and impose significant fiscal burdens on states.