Eurozone bank resolution and Bail-In-Intervention, triggers and writedowns

The European Union has recently introduced the Single Resolution Mechanism (SRM) to provide a consistent set of rules concerning Eurozone bank resolution. In this study, we retrospectively examine the implications of the SRM for Eurozone banks during the global financial crisis. Empirical results indicate that large, systemically important Eurozone banks would have exclusively required equity writedowns to cover impairment losses. However, to ensure adequate capitalization post bail-in, the majority of large, listed banks would have required conversion to equity for all subordinated and some senior debt creditors. Depositors would not have experienced writedowns in any of the banks examined. Given the subjective nature of resolution triggers outlined in the SRM, we also study the potential benefits of market and balance sheet dependent triggers. While our findings suggest some weak evidence of a capacity to differentiate between failed and surviving banks, the results are indicative of the difficulties in mandating predefined quantitative resolution triggers.