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An anatomy of bank bail-ins – why the Eurozone needs a fiscal backstop for the banking sector

Goodhart, Charles and Avgouleas, Emilios (2016) An anatomy of bank bail-ins – why the Eurozone needs a fiscal backstop for the banking sector. European Economy: Banks, Regulation, and the Real Sector (2). ISSN 2421-6917

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Bail-ins could prove an effective way to replace the unpopular bail-outs. In the EU the doom-loop between bank and sovereign indebtedness left governments with a major conundrum. Thus, the EU resolution regime requires the prior participation of bank creditors in meeting the costs of bank recapitalisation before any form of public contribution is made. But, there is a danger of over-reliance on bail-ins. Bail-in regimes will not remove the need for public injection of funds, unless the risk is idiosyncratic. This suggestion raises concerns for banks in the periphery of the euro-area, which present very high levels of non-performing assets, crippling credit growth and economic recovery. To avoid pushing Eurozone banks with high NPL levels into bail-in centred recapitalisations, we have considered the benefits from and legal obstacles to the possible establishment of a euro-wide fund for NPLs that would enjoy an ESM guarantee. Long-term (capped) profit-loss sharing arrangements could bring the operation of the fund as close to a commercial operation as possible. Cleaning up bank balance sheets from NPLs would free up capital for new lending boosting economic recovery in the periphery of the Eurozone.

Item Type: Article
Official URL:
Additional Information: © 2016 The Author
Divisions: Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
J Political Science > JZ International relations
Date Deposited: 19 Jan 2017 15:04
Last Modified: 15 Sep 2023 15:36

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