Title: "Bail-In and Total Loss-Absorbing Capacity (TLAC) – Legal and Economic Perspectives on Bank Resolution with Functional Comparisions of Swiss and EU Law"
The objective of this dissertation is the contextualisation of the bail-in bank resolution tool and the identification and discussion of legal and economic issues that may arise in the implementation of a bail-in. The following research questions are examined:
- What are the particular challenges and objectives of bank resolution, both functionally and historically, and to what extent can the bail-in resolution tool contribute to the achievement of these objectives?
- What are the legal and economic properties of bail-in capital, particularly in respect to bail-in capital as set out in the regulatory standard on Total Loss-absorbing Capacity (TLAC) issued by the Financial Stability Board (FSB)?
- What is the scope, sequence, and scale of a bail-in and what is the legal position of stakeholders affected by a bail-in under Swiss law?
- What are the fundamental strategies and procedures for the implementation of a bail-in, and how do these strategies and procedures relate to substantive bail-in law?
The author presents five central claims:
- First, although it is not a panacea, the bail-in has the potential of being a powerful resolution tool if sufficient loss absorbency is available. However, the true strength of the bail-in and TLAC regulations lies in their potential to enable market discipline and avoid implied subsidies associated with the too-important-to-fail (TITF) problem.
- Second, a bail-in should strictly take account of the differentiation of ‘financial’ liabilities of a bank (in simple terms, the liabilities that banks are in the business of incurring) and corporate debt. It should shield these ‘financial’ liabilities from losses to preserve their liquidity-providing and risk-shifting functions. To achieve this aim, certain deviations from the pari passu principle and a sufficient pre-positioning of subordinated debt is necessary.
- Third, TLAC and bail-in can shield the taxpayers from recapitalisation costs to a certain extent. On the other hand, the need for a public recapitalisation may still arise. These considerations particularly apply in systemic banking crises. Such resolution funding should be made available in a narrow set of circumstances either through an ex ante financed resolution fund or governmental funding that is levied from the financial sector ex post. The circumstances under which government rescues are available should be precisely set out in positive law.
- Fourth, viewing the firm as a nexus of contracts, the opening of bank resolution proceedings alters the payoffs of contracts within a firm analogously to bankruptcy proceedings. From a constitutional perspective, creditors and shareholders alike have a claim to at least the value that they would have received under the ordinary insolvency regime.
- Fifth, although the bail-in of G-SIBs is a convincing resolution concept from a theoretical perspective, the cooperation between the home and host authorities is the linchpin of its practical implementation. International cooperation must be clearly defined ex ante for each G-SIB. Whether detrimental ring-fencing and other cross-jurisdictional problems can indeed be avoided in a crisis remains untested at this time.