Author(s): Clas Wihlborg
Date published: Jan 2017
SUERF Policy Note, Issue No 10
Clas Wihlborg, Chapman University, USA, and University West, Sweden
JEL-Codes: G28, G33 and G38.
Keywords: Bail-in, bail-outs, bank resolution, bankruptcy law, CoCos, debt-equity swaps, G-SIBs, haircuts, insolvency law, living wills, market discipline, recapitalization, Single Resolution Mechanism, systemic risk, too-big-to-fail.
A fundamental problem in banking and an important source of excessive risk-taking has been the perception that banks’ creditors are protected against losses as a result of bank failures. Most countries have explicit deposit insurance schemes in place but this explicit insurance is usually limited. Implicit protection of other creditors has been based on expectations that they would be bailed out by a government in case a bank fails. The bail-outs have taken the form of blanket guarantees by governments of all debts, asset purchases, asset price guarantees, access to subsidized financing, recapitalization or simply forbearance with high asset valuation. Download Full Text