The Bail-in Beyond Unpredictability: Creditors’ Incentives and Market Discipline

Abstract

The market discipline of creditors on the risk-taking behaviour of borrowing banks represents a long-lasting debate. Such a debate gained new attention after the postcrisis stream of reforms concerning resolution policy: creditors should be incentivized to make an optimal effort in monitoring their borrowers and, at the same time, their interests have been aligned with the social ones. Many commentators criticized such an expectation especially in the European context, arguing that the lack of credibility and excessive complexity of the resolution mechanism impair the ability and willingness of creditors to exert a disciplining role. This article aims at taking a step forward in this scientific debate, investigating whether the ability to exert disciplining activity is inherently impaired by the design of the Directive. In other words, this research wants to assess if, assuming an ideal environment, creditors would have optimal incentives to monitor banks' behaviour and to react accordingly. To do so, the article reviews the literature on market discipline, then carries out a legal analysis of the Bank Recovery and Resolution Directive (BRRD), focusing on those norms shaping the market for bail-inable securities. Eventually, the incentives stemming from those norms are discussed, assuming an ideal environment where a bailin is certain and credible and the market for bail-inable securities works smoothly. The analysis highlights that the incentives of creditors toward market discipline are inherently diluted by the BRRD's legal design because of competing policy objectives pursued by the Directive. The direct normative consequence of such a finding is that enhancing information and predictability, though desirable in principle, will never lead to an optimal monitoring effort, leaving the floor to alternative rule-based strategies.

Discipline and Work Environment Affect Employee Productivity: Evidence From Indonesia

“…Stated that what is meant by discipline is an effort made to create a state in an orderly (Alter et al, 2020;Haghani & Bliemer, 2020;Ji et al, 2020;Johnston, 2020;Martino, 2020;Sun et al, 2020), effective and successful work environment through an appropriate system (Engelbrecht, 2009;Guo, 2010;Jones et al, 2010;Klimoviene et al, 2016;Nikolou-Walker & Curley, 2012;Yaghoubi et al, 2018).…”

“…The discipline of work is very important because, without the discipline of work, every job will not be completed properly (Abell & Sevian, 2020;ĐorĎević, 2020;Lund et al, 2020;Mphatheni et al, 2020;Richter et al, 2020;Serebryakov, 2020). Thus it is undeniable that work discipline is the determining factor of success in a company; if the discipline of work is ignored will hinder and harm the company (Busta & Russo, 2020;Charity Hudley et al, 2020;Hu & Liu, 2020;Martino, 2020;Rodriguez et al, 2020;Wang et al, 2020). Because without discipline, it will decrease employee performance so that the company's target will not be achieved (Björkhagen Turesson, 2020;Farley-Ripple et al, 2020;Fitzgerald & Jiang, 2020;Martimianakis et al, 2020;Millstein et al, 2020;Rodríguez-Araya et al, 2020).…”

Getting Bank Governance Right - The Interplay between the Resolution Framework and the Role of Creditors, with an Application to EU Law

“…17 See Avguleas and Goodhart [17]. In the EU context, Tröger [18] and also Martino [19]. 18 On the concept, cause and consequences of the so-called "regulatory pendulum", see Pacces and Heremans [20].…”

“…To substantiate this claim and translate it into a concrete regulatory proposal, the second part of the article discusses the specific case of the EU resolution framework; namely the Bank Recovery and Resolution Directive (BRRD). 19 Currently, the BRRD creates more problems than the ones it solves. So far, it proved to be ineffective ex-post, in handling the cases of resolution, and inefficient ex-ante in incentivising toward optimal risk-taking.…”

The Rise of ‘Group Solution’ in Insolvency Law and Bank Resolution

“…See De Serière and Van der Houwen ( 2016 ), p 377. See also Martino ( 2020 ), emphasizing that the policy goals of preserving financial stability and protecting property rights (i.e. by way of the NCWO rule) clearly outweigh other considerations, including the minimization of resolution costs or the avoidance of value destruction.…”