“The Theory of Bank Resolution: Does the Bail-in Work?” by Urs Lendermann (Deutsche Bundesbank University of Applied Sciences) was published on 23 August 2023 in the EBI Working Paper Series No. 150.
The Credit Suisse default triggered considerable discourse surrounding the absence of any bank resolution procedure. Instead, public guarantees and unconventional emergency liquidity assistance were granted. This situation prompts the author to explore the bail-in tool and the total loss-absorbing capacity (TLAC) which were introduced by the G20 Financial Stability Board to eliminate the need for public bailouts of global systemically important banks in case of failure. Acknowledging the pragmatic standpoint, it is essential to recognize that banks hold divergent perspectives concerning their resolution planning while policymakers continue to grapple with the persistent ‘too big to fail’ dilemma without a clearly discernible pathway for resolution. In light of these premises, the author proposes to consider contractual approaches to enhance the TLAC framework, incorporating a market-based trigger design as a signal for eroding market confidence. These improvements aim to create conditions that enable central banks to provide emergency liquidity assistance, thereby averting systemic disruptions during a financial crisis.