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Roundtable on the Banking and Capital
Markets Union – Bail-in vs. Bail-out
Peter Benczur
European Commission, Joint Resear...
Disclaimer
The views expressed are those of the author and do not
necessarily reflect the official view of the European
Comm...
The ERFRA exercise – farewell to bail-out in general?
Economic Review of the Financial Regulation Agenda
A cumulative eval...
The role of bail-in in the ERFRA exercise
After bail-in, the safety net is not that important
Baseline Baseline+bail-in Al...
Is bail-in indeed omnipotent?
Where do bail-in losses go? We do not know much of it!
Data needed: detailed cross-exposure ...
The general question: the moral hazard vs good
loss-absorber tradeoff
The government may be a good loss absorber (though n...
Do we have a good understanding of such “financial
chains”?
Theory
The literature on credit chains: Kiyotaki-Moore 1997, Al...
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Roundtable on the Banking and Capital Markets Union – Bail-in vs. Bail-out | COEURE Workshop on Financial Markets

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COEURE Workshop on Financial Markets

By: Peter Benczur, European Commission, Joint Research Centre (JRC)

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Roundtable on the Banking and Capital Markets Union – Bail-in vs. Bail-out | COEURE Workshop on Financial Markets

  1. 1. Roundtable on the Banking and Capital Markets Union – Bail-in vs. Bail-out Peter Benczur European Commission, Joint Research Centre (JRC) June 6, Florence
  2. 2. Disclaimer The views expressed are those of the author and do not necessarily reflect the official view of the European Commission. Benczur Bail-in vs. bail-out
  3. 3. The ERFRA exercise – farewell to bail-out in general? Economic Review of the Financial Regulation Agenda A cumulative evaluation of the impact of the “Banking Union” on potential losses hitting public finances (PF) The “political wish”: no public money will be spent on bank resolution once all the legislation is in effect The JRC finding: much less public money PF conditional on a crisis event similar to the recent (% of EU GDP) Notional likelihood of no PF losses (1) Baseline 3.7% 20% (2) All reforms 0.46% 12% Ratio of 2 to 1 (%) 12.43% Benczur Bail-in vs. bail-out
  4. 4. The role of bail-in in the ERFRA exercise After bail-in, the safety net is not that important Baseline Baseline+bail-in All reforms Capital 230 230 363 Bail-in 0 296 219 RF 0 0 58 PF 478 182 68 A better safety net might (have) allowed a smaller bail-in There are some “loose ends” of the rules, and for a reason Exceptions due to “financial stability considerations” Remember Cyprus... Germany is considering such exemptions in legislation Benczur Bail-in vs. bail-out
  5. 5. Is bail-in indeed omnipotent? Where do bail-in losses go? We do not know much of it! Data needed: detailed cross-exposure in bonds by banks Or at least at the sectoral level Financial accounts data are like that but not fine enough... The JRC bail-in project Extrapolate the detailed cross-exposure matrix of sectors The banking sector of a country is hit by a large shock Trace its impact on other sectors using the estimated exposure matrix A lot of bail-in losses would create further losses and safety net intervention needs Then the safety net might become more important again! It goes on until they reach some ultimate loss absorbers Benczur Bail-in vs. bail-out
  6. 6. The general question: the moral hazard vs good loss-absorber tradeoff The government may be a good loss absorber (though not always) But bail-out creates moral hazard Who are the good ultimate loss absorbers? Governments? Households? “Financial deep pockets” like sovereign wealth funds? LOLR institutions – CBs? Supranationals? An issue of democratic authorisation, accountability and control... Benczur Bail-in vs. bail-out
  7. 7. Do we have a good understanding of such “financial chains”? Theory The literature on credit chains: Kiyotaki-Moore 1997, Allen and Gale 2000, Boissay 2006 New literature on financial complexity – Caballero-Simsek 2013, Zawadowski 2013,... Endogenous financial networks: Babus 2013, Babus-Kondor 2014, ... The role of a LOLR in such a framework? Data issues The ESCB MARS attempt to look at cross-border exposure Can the SSM help? Benczur Bail-in vs. bail-out

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