1. The New European Legal Framework for Banking Crisis Management:
from Bail-out to Bail-in. What’s next?
XXV International Financial Congress
St. Petersburg
1 st July 2016
Giuseppe Boccuzzi

2. The financial crisis: two phases
Subprime crisis in the USA; Lehman Brothers failure; multiple banking crises in the USA and Europe.
Public interventions
(State bail-outs)
the crisis spreads to sovereigns in many countries, especially in the Eurozone (Portungal, Ireland, Greece, Spain and Italy).
Global economic crisis
Vicious cycle
banking risk-sovereign risk

3. The first phase of the crisis: public interventions
ECB:
Financial resources needed to finance government bail-out in the Euro area are estimated at 5,1% of the GDP for the whole period

4. The FSB reaction to the crisis (2011)
The Key Attributes of Effective Resolution Regimes for Financial Institutions .
…Their implementation should allow authorities to resolve financial institutions in an orderly manner without taxpayer exposure to loss from solvency support, while maintaining continuity of their vital economic functions.
An effective resolution regime should: …
(iii) allocate losses to firm owners (shareholders) and unsecured and uninsured creditors in a manner that respects the hierarchy of claims;
(iv) not rely on public solvency support and not create an expectation that such support will be available.

5. The regulatory response to the crisis in Europe: reforming financial regulation
Strengthen prudential and supervisory rules to prevent banking crises
Set more effective rules for managing banking crises, in order to reduce the cost of any possible crisis on the stakeholders
Two main elements 
Avoid that the costs of banking insolvency fall on taxpayers
Privatisation of profits -
socialization of losses

6. The European Banking Union: a new institutional set-up and a single rulebook
Single supervisory authority
(SSM - Single Supervisory Mechanism)
Single resolution authority and single resolution Fund
Single deposit guarantee scheme
Set of harmonised rules at EU level - Single rulebook
Harmonised network of DGSs
EDIS project
CRR (EU Reg. n. 575/2013 of 26/6/2013) and CRD IV (Directive 2013/36/CE of 26/6/2013) - Basel 3
Directive on deposit guarantee schemes (DGSD)
Directive on bank recovery and resolution (BRRD)and SRM Regulation
ESM
Banking Union

7. The new configuration of the safety-net in the European Union
Micro prudential supervision
Vigilanza macro prudential supervision
Deposit guarantee
Resolution
Lender of last resort
Prudential regulation
Safety net
Distinction between regulation and supervision
Distinction between micro and macro supervision
A new procedure for managing banking crises (Resolution)

8. The new framework for bank recovery and resolution: an integrated approach the logic of prevention
Preparatory measures
Early intervention
Resolution
BRRD
Resolution
Fund
Liquidation
Recovery plans
Resolution plans

9. Resolution Triggers Objectives Principles Failing or likely to fail
No alternative private solution feasible to avoid failure
Public interest
Principles
Objectives
Continuity of critical functions
Avoid adverse effects on Financial stability
Avoid contagion
Mainatain market discipline
Minimise use of public funds
Protect covered depositors and investors
Safeguard clients’ funds and assets
Shareholders first
Burden sharing
Replace Management
Par condicio creditorum
No creditor worse-off
Covered depositors fully protected

10. Bad bank-good bank separation
Resolution tools
Minimum set of tools Member States may use other tools available at a national level, provided that they allow that the objectives set forth in the Directive are met
Sale of business
Bad bank-good bank separation
Bridge bank
Bail-in
Minimum toolkit
Government financial stabilization tools: (support with public equity, temporary public ownership).
Going concern solutions
Gone concern solutions

11. From bail-out to bail-in and other private resources
Coverage of losses
From bail-out to bail-in and other private resources
Private sector
Shareholders and creditors
Resolution fund
Deposit guarantee schemes
Write-down and conversion of capital instruments 1
Resolution 2
Liquidation 3
Voluntary Scheme

12. Question: To what extent the private sector can bear the cost of the crisis?
The European Union State Aid rules and the BRRD are important checks on market distortions and moral hazard, but they should be implemented carefully, as public support may still be needed in a crisis.
IMF
2016
An instrument - the bail-in - devised to reduce the impact of a crisis must not create the premises to make one more likely: if this is the case, its design and/or its implementation must be rethought. We must strike the right balance: indeed, investors who have been hit by a bail-in will find no comfort in the fact that they have been protected as taxpayers.
Bank of Italy
Gov.

13. Losses do not disappear… sectoral allocation of losses matters
Losses do not disappear… sectoral allocation of losses matters. What are the implications of bail-in?
The exposure of the leveraged financial sector to bail-inable debt should be limited so as to contain potential contagion risks and financial instability...
…Households may not be fully aware of the risks associated with bail-inable debt, thus potentially raising consumer protection concerns. In this respect, ad-hoc policy intervention may enhance bail-in credibility
OECD
2016

14. Is public support still needed?
When bail-in might create a risk of systemic instability, a temporary public backstop is still needed. The European framework envisages that where necessary to preserve financial stability, then also public funds should be used.