Anatomy of a Bail-In

To mitigate potential contagion from future banking crises, the European
Commission recently proposed a framework which would provide for the
bail-in of bank creditors in the event of failure. In this study, we
examine this framework retrospectively in the context of failed European
banks during the global financial crisis. Empirical findings suggest that
equity and subordinated bond holders would have been the main losers
from the e535 billion impairment losses realized by failed European
banks. Losses attributed to senior debt holders would, on aggregate,
have been proportionally small, while no losses would have been imposed
on depositors. Cross-country analysis, incorporating stress-tests,
reveals a divergence of outcomes with subordinated debt holders wiped
out in a number of countries, while senior debt holders of Greek,
Austrian and Irish banks would have required bail-in.