Comment on the European Parliament Draft Report on the Proposal for a Recovery and Resolution Directive

Policy Letter No. 14, 2012

Authors:
Jan Pieter Krahnen
Research Area:
Financial Intermediation
Date:
Nov 2012
Keywords:
bail-in bonds, bank resolution, Liikanen Report
Abstract:

This present comment suggests an amendment to the proposal for a directive of the European Parliament and of the Council, establishing a framework for the recovery and resolution of credit institutions and investment firms. The current proposal focuses on bail-in, but does not sufficiently take into account the pressure exerted on central bankers, supervisors and politicians by the fear of interbank contagion. The only way out of this hold-up type of situation can be found in bail-in bonds. Bail-in bonds are dedicated loss taking debt instruments, whose status of being first in line if it comes to default is clearly communicated from day one.

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