The impact of bank resolution and bail-in mechanisms on bank management

By Prof Dr Freddy Van den Spiegel (Vlerick Business School and VUB)

Bank resolution, including bail-in of bank liabilities will be a normal procedure for managing banks in crisis in the EU, within and outside the banking union. The potential impact of these new rules for bank management goes much further than just complying. Some of the more strategic challenges are:

  • Bank resolution and the principle of bail-in will be pro-cyclical, as deposit holders and other investors in bank debt will not take the risk to be bailed-in. It means that banks will have very little time to manage a recovery, once they are considered to be in trouble. Furthermore, pro-cyclicality will force supervisors to switch quickly to resolution. Banks should be prepared to such scenarios.
  • Resolution plans will potentially have an impact on the internal organization of big banks. Improving resolvability will be a key goal of resolution authorities. That leads automatically to pressure for more simple and straightforward structures, occasionally leading to less efficiency. Banks will have to take this new reality into account when optimizing their organization.
  • Managing the “bail-in risk” will be essential to stabilize a bank in turbulent times and to keep funding costs under control. Using new instruments, pricing correctly bail-in risk, managing the liability structure of the balance sheet and adapting the external communication to the new context will become important issues..
  • Banks will have to develop a balanced approach in optimizing the funding costs. Looking for cheap funding based on encumbering assets, while convincing the authorities about the sufficient quality of the remaining unencumbered assets will be an important challenge for balance sheet management.
  • Banks will have to assess carefully in how far resolution, including bail-in, on top of all other new banking regulations, will lead to an increased pressure on the traditional banking intermediation channel, in favor of more market based mechanisms. They will have to find a delicate balance between enjoying as long as possible their privileged position of traditional bank intermediation, and getting prepared for the future market and shadow banking developments.

Download the full paper "The impact of bank resolution and bail-in mechanisms on bank management" by Prof Dr Freddy Van den Spiegel.

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