Bail-In: A Sustainable Mechanism for Rescuing Banks

Abstract

Until the Great Recession, rescuing banks with taxpayers’ money had been the preferred way to deal with banking crises. The dramatic effects of these practices on the real economy highlighted that bailouts are not a sustainable method to resolve troubled banks going forward. As a result, a new regulatory framework has been proposed, forcing the financial industry to move from “bailout” to “bail-in.” Understanding the implications of such a change is key to ensuring the success of these new banking rules. This article aims to build up a comprehensive and unbiased set of research articles in order to draw conclusions about the current status of the academic literature in the field of capital and loss absorption requirements. A research agenda on the topic is also proposed. The methodological approach undertaken is based on ProKnow-C (Knowledge Development Process-Constructivist). We also contribute to the development of Proknow-C methodology by adding a cross-reference extension to the original framework. The results of our analysis point out that further research has to be undertaken on the subject of loss absorption requirements.

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“…The measures also allow the conversion of receivables into shares. In order for bail-in to be truly feasible and convincing (Sanchez-Roger et al, 2018), 'it is necessary for banks to ensure a minimum level of bail-in available funds that are convertible into shares or stakes'. Also, the bail-in mechanism enables the bank to write off debts or some other items in liabilities with its own funds, and in that way the endangered bank is relieved.…”