No. 968 - Financial stability considerations on bail-in
This paper discusses the ability of bail-in procedures (whereby creditors are involved in the resolution of large banks) to achieve some of the objectives defined by the regulatory reforms introduced after the global financial crisis (strengthening market discipline, reducing moral hazard, solving the problem posed by 'too big to fail' banks). To this end, the paper conducts an economic analysis of the bail-in resolution system and of its effects on the structure of incentives and on the behaviour of large banks and other stakeholders.
The EU Banking Resolution and Recovery Directive (BRRD) involves complex rules and mechanisms that can be accompanied by discretionary elements in some cases. There could thus be some uncertainty in the application of the bail-in procedure leading to difficulties in achieving its objectives. The paper suggests that a credible regulatory framework and clear decision-making processes for the actors involved would strengthen market discipline and reduce moral hazard.
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09 October 2025
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