During the recent financial crisis several banks were bailed out by governments using taxpayers’ money. As a response to the Financial crisis, the European Union reacted and ratified the Bank Recovery and Resolution Directive (BRRD – 2014/59/EU). The BRRD provides a framework to force the banks’ shareholders and debtholders, who are the actual beneficiaries of a bank’s business in good times, to internalize the costs in the event of bank distress (bail-in).

Nevertheless, it is far from certain that the new legal framework will contribute to more stability in the financial sector. The current legal approach may simply be too insufficient and the amount of bail-inable debt that European banks hold far too low to, for instance, recapitalize banks during the financial crisis. Furthermore, stricter regulatory requirements may create false incentives and more capital flows into the shadow banking system, decreasing overall financial stability.

Furthermore, banks may respond to the legal changes by adjusting their debt structure. This form of regulatory arbitrage remains possible because the Minimum Requirement of Eligible Liabilities (MREL) under the BRRD/SRM and the prescription of a Total Loss-Absorbing Capacity (TLAC) issued by the Financial Stability Board (FSB) only define lower bounds for the composition of the liability side of banks’ balance sheets.  

The “Bail-in-Tracker” 

The goal of the project “Bail-in-Tracker” is (1) to collect information on the debt issuance of European banks, (2) construct a time series of the bail-inable debt of these banks at a high frequency and (3) analyze this data set. The “Bail-in-Tracker” hopes to inform about the effectiveness of the bail-in regulation by using different publication channels and to provide specific reform proposals.  

In particular, we focus on three main questions: 

  1. Would the existence of a bail-in regulation in the spirit of the BRRD have limited the extent of government bail-outs during the financial crisis? 
  2. Have European banks changed the structure of their balance sheets since the ratification of the BRRD and, by doing so, circumvented the legislator’s objective? 
  3. How did the announcement and ratification of the BRRD affect stock market returns of European banks given each bank’s level of bail-inable debt? 

The interim and final scientific results are to be disseminated through the publication channels of the Research Center SAFE (Working Paper Series, Policy Paper Series) and of the Börsen-Zeitung (articles in the series “Bail-in-Tracker”). They will also be reported on this website. 

The newly constructed data set will be updated regularly. Hence, it will offer detailed and up-to-date information on the stability of European banks and on the level and importance of outstanding bail-inable debt. The developed measure for bail-in capacity may further be used as one out of several indicators in an evaluation of the general level of financial stability in Europe.

A visualization tool, based on the underlying dataset, will also be made publicly available. The tool will enable interested parties to search for the current level of bail-inable debt for a given European bank at a certain point in time and examine the evolution of bail-inable debt graphically. 

The project results will contribute to the public as well as academic debate on financial stability and will provide information for an effective financial regulation. Furthermore, through the intermediation between science and journalism a wider coverage and a broader discussion of the bail-in regulation will be achieved.