Automated bail-in: eliminating regulatory restraints

Lende mann, U s B.
A icle — Published Ve sion
Au oma ed bail-in: elimina ing egula o y es ain s
Jou nal o Banking Regula ion
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Sp inge Na u e
Sugges ed Ci a ion: Lende mann, U s B. (2025) : Au oma ed bail-in: elimina ing egula o y es ain s,
Jou nal o Banking Regula ion, ISSN 1750-2071, Palg a e Macmillan, London, Vol. 26, Iss. 3, pp.
370-391,
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Jou nal o Banking Regula ion (2025) 26:370–391
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ORIGINAL ARTICLE
Au oma ed bail‑in: elimina ing egula o y es ain s
U sB.Lende mann1
Accep ed: 16 Decembe 2024 / Published online: 23 Janua y 2025
© The Au ho (s) 2025
Abs ac
The C edi Suisse de aul in 2023 spa ked conside able discou se abou he absence o bank esolu ion p ocedu es. Ins ead o eso-
lu ion, public gua an ees and uncon en ional eme gency liquidi y assis ance (ELA) we e p o ided. O cou se, his occu ed nea ly
wo decades a e he global inancial c isis o 2007–2009, and e iden ly, he e a e s ill lessons o be lea ned. This s udy explo es
he bail-in ool and he o al loss-abso bing capaci y (TLAC) in oduced by he G20 Financial S abili y Boa d o elimina e he need
o public bailou s o global sys emically impo an banks in case o ailu e. Acknowledging he p agma ic s andpoin , i is essen ial
o ecognise ha banks hold di e gen pe spec i es conce ning hei esolu ion planning while policymake s con inue o g apple
wi h he ‘ oo-big- o- ail’ dilemma wi hou a disce nible pa hway o esolu ion. Thus, his s udy p oposes con ac ual app oaches
o enhance he TLAC amewo k, inco po a ing a ma ke -based igge design. These imp o emen s aim o c ea e condi ions ha
enable cen al banks o p o ide ELA, he eby a e ing sys emic dis up ions du ing a inancial c isis.
Keywo ds Addi ional Tie 1 (AT1)· To al loss-abso bing capaci y (TLAC)· Global sys emically impo an bank (GSIB)·
Financial s abili y· Bail-in· Too-big- o- ail (TBTF)· Eme gency liquidi y assis ance (ELA)
JEL Classi ica ion E44· F34· G12· G21· G28· K23
* U s B. Lende mann
[email p o ec ed]
1 Deu sche Bundesbank Uni e si y o Applied Sciences,
Hachenbu g, Ge many
371Au oma ed bail-in: elimina ing egula o y es ain s
In oduc ion
This s udy p oposes amendmen s o he esolu ion amewo k
o global sys emically impo an banks (G-SIB) o ensu e
e ec i e p i a e sec o loss abso p ion du ing a inancial c i-
sis. The ‘ oo-big- o- ail’ (TBTF) egula o y e o ms aimed a
G-SIBs we e implemen ed in esponse o he global inancial
c isis (GFC) o 2007–2009. These e o msha e been sc u inised
and con inue o wa an close e alua ion.1 Bea ing in mind he
sho comings e ealed du ing he banking u moil o Ma ch
2023, his s udy e isi s he Financial S abili y Boa d’s (FSB)
Key A ibu es o E ec i e Resolu ion Regimes o Financial
Ins i u ions (‘FSB Key A ibu es’),2 wi h a pa icula ocus on
he de ini ion and applica ion o o al loss-abso bing capaci y
(TLAC).3
The s udy ad oca es o a con ac ual app oach o ensu e
ha signi ican capi al measu es a e implemen ed du ing he
eco e y phase, e ec i ely a e ing a de aul . I p oposes
educing au ho i ies’ disc e ion in ini ia ing he c isis man-
agemen p ocess by in oducing a manda o y, ule-based
igge ing mechanism wi h limi ed lexibili y, d awing inspi-
a ion om ma ke -based igge designs. This app oach
challenges he adi ional dis inc ion be ween going-con-
ce n capi al (Tie 1) and gone-conce n capi al (Tie 2 and
TLAC-eligible liabili ies), aiming o enhance he o e all
e ec i eness o he esolu ion amewo k. Addi ionally, i
unde sco es he need o cla i y he c edi o hie a chy and
educe he complexi y and opaci y su ounding TLAC-
eligible ins umen s. The s udy pays pa icula a en ion
o in e -c edi o ela ionships and he anking o equi y
sha es—issues ha spa ked signi ican con o e sy ega d-
ing he loss-abso bing capaci y o Addi ional Tie 1 (AT1)
ins umen s du ing he ecen C edi Suisse de aul .4 Finally,
he s udy ecommends implemen ing pa allel measu es o
align he loss abso bency amewo k wi h cen al bank eme -
gency liquidi y assis ance (ELA) p o isioning, ensu ing a
cohesi e app oach du ing inancial c ises.
The emainde o his s udy is o ganised as ollows. Sec-
ion“A i ing a his poin in bank egula ion” o e s insigh s
in o he e olu ion o TBTF egula ion, illus a ing he a i-
ous ac o s and in e es s ha in luence he egula o y p ocess
in his con ex . Building on his, Sec .“P ese ing unding
cos ad an ages” add esses how unding cos ad an ages
esul ing om implici s a e gua an ees could ha e been p e-
se ed and inadequa e p icing should ha e been mi iga ed.
Sec ion“P ese ing he banking g oup s uc u e” ackles he
impac o he esolu ion amewo k on G-SIBs’ in e na ional
g oup s uc u es. Sec ion“Sha e ing he illusion o bail-
in igge ce ain y” analyses he bail-in igge mechanism
and i s impac on he decision-making p ocess, con as ing
i wi h he manda o y con ac ual app oach ound in Swiss
con ingen con e ible bonds (CoCo). Sec ion“P oposal o
enhancing TLAC-eligible liabili ies” p oposes speci ic ma -
ke -based enhancemen s o he cu en TLAC e ms based
on his s udy’s indings. Sec ion“Conclusion” syn hesises
he main poin s.
A i ing a  his poin inbank egula ion
P e‑emp i e sel ‑ egula ion
Keyde ails o  he TBTF egula o y p ocess p o ide insigh s
in o he p oposed esolu ion measu es and e ol ing ame-
wo ks. The GFC p ecipi a ed a su ge in demand o e ec i e
esolu ion mechanisms as well as se e al dis inc phases o
egula o y esponses. Fi s , du ing he c isis, some banks
we e ini ially le o ail wi hou in e en ion o he pu pose
o es ablishing a p eceden ; howe e , his expe ience only
unde sco ed he u gen need o p e en se e e sys emic dis-
up ions. Subsequen ly, banks ha we e ailing o likely o
ail ecei ed public bailou s a he axpaye s’ expense, lead-
ing o poli ical ac ions o sa egua d cus ome s, c edi o s, he
inancial sys em, and he b oade economy. Second, in he
immedia e a e ma h o he c isis, public demand o s ic e
1 See he FSB e alua ion epo on he TBTF e o ms in he bank-
ing sec o comple ed be o e he G20 Global Summi . FSB, E alua-
ion o he E ec s o Too-Big- o-Fail Re o ms (2021) Final Repo . A
he EU le el, he Eu opean Commission had p oduced a epo on he
new bank esolu ion egime in 2019, he Repo o he Eu opean Pa -
liamen and he Council on he Applica ion and Re iew o Di ec i e
2014/59/EU (Bank Reco e y and Resolu ion Di ec i e) and Regula-
ion 806/2014 (Single Resolu ion Mechanism Regula ion) (30 Ap il
2019).
2 The FSB’s Key A ibu es o E ec i e Resolu ion Regimes o
Financial Ins i u ions was ini ially published in Oc obe 2011
and adop ed by he G20 a he Cannes Summi in No embe 2011.
Adjus men s and amendmen s ollowed on 15 Oc obe 2014, and
mos ecen ly on 25 Ap il 2024.
3 FSB, ‘P inciples on Loss-Abso bing and Recapi alisa ion Capac-
i y o G-SIBs in Resolu ion: To al Loss-Abso bing Capaci y (TLAC)
Te m Shee ’ (9 No embe 2015).
4 Pa ick Bol on, Wei Jiang and Anas asia Ka ashe a, ‘The C edi
Suisse CoCo Wipeou : Fac s, Mispe cep ions, and Lessons o Finan-
cial Regula ion’ (2023) 35 Jou nal o Applied Co po a e Finance
66 < h ps:// doi. o g/ 10. 1111/ jac . 12553 > ; Ja ie Valbuena Paz, and
Ho s Eidenmuelle , ‘Bailou Blues: The W i e-Down o he AT1
Bonds in he C edi Suisse Bailou ’ [Ap il 1, 2023] Eu opean Co -
po a e Go e nance Ins i u e—Law Wo king Pape 705/2023 < h ps://
ss n. com/ abs ac = 44311 70 > ; Diego Valian e, ‘The las days o
C edi Suisse: Banking C isis Managemen Unde Siege’ [Janua y
2023] Ri is a delle Socie à 244; Zhenyu Wang, ‘CoCo Bonds: A e
They Deb o Equi y? Do They Help Financial S abili y? — Lessons
om C edi Suisse NT1 [AT1] Bonds’, [6 Ap il 2023] ECGI < h ps://
www. ecgi. global/ con e n / coco- bonds- a e- hey- deb - o - equi y- do-
hey- help- inan cial- s abi li y > .
Foo no e 4 (con inued)
372 U.B.Lende mann
bank egula ion eme ged, wi h policymake s p omising ha
such bailou s would ne e happen again, gi en hei a -
eaching implica ions ha su passed me e iscal conce ns.5
Howe e , he hi d phase wi nessed sys emically impo an
banks sub ly exe ing in luence o e he egula o y p ocess
as public a en ion waned,6 po en ially se ing he s age o
he nex inancial c isis.
Indeed, om 2009 onwa d, a no able poli ical equilib-
ium eme ged, whe e he demand o and supply o egula-
ion ound a p eca ious balance. This in ica e equilib ium
ends o be he esul o se e al ac o s, including asymme -
ic in o ma ion, di e se indi idual s akes, he in luence o
poli ical dynamics, and he di e ing ma ginal gains associ-
a ed wi h egula ion.7
Conside ing he alignmen o in e es s, policymake s
aced he Sisyphean ask o adequa ely esponding o he
unp eceden ed public bailou ha occu ed du ing he GFC.
The G-SIBs ha bou ed he g a es ea s while awai ing his
esponse, d awing om his o ical p eceden s ha demon-
s a ed he poli ical will and abili y o ac (e.g. he b eakup
o AT&T and he 1933 Glass-S eagall Ac 8). In his se -
ing, ep esen a i es o C edi Suisse o e ed policymake s
a s a egic coun e -na a i e by e aming he concep o a
‘bailou ’ as a ‘bail-in’.9 In sho , he bail-in ool empowe s
esolu ion au ho i ies o ha e he losses o a ailing bank
imposed on i s in es o s and c edi o s ei he h ough a w i e-
o 10 o empo a y w i e-down o ce ain liabili ies,11 o by
con e ing hem in o sha es o o he capi al ins umen s.12
Th ough seman ics, he bail-in echnically nega ed he TBTF
p oblem.13
Re isi ing he oo big o ail p oblem
The so-called P i a e Sec o Bail-in Ini ia i e, o med by
C edi Suisse and joined by se e al o he G-SIBs, la e
endo sed he bail-in concep , aising ques ions abou i s ben-
e icia ies and po en ial implica ions. This led o an eme g-
ing symbiosis be ween he indus y and policymake s o
add ess hei mu ual challenge, ha is, o e ing a con incing
solu ion o he TBTF conund um while ensu ing minimal
esis ance om he inancial indus y and mi iga ing poli i-
cal epe cussions.
The li e a u e on he incen i isa ion o public o icials
e eals ha ‘bu eauc a s’, d i en by sel -in e es and ca ee
ambi ions, use hei disc e ion o adap o challenges, expand
hei agency’s in luence, a oid liabili y, and secu e u u e
oppo uni ies, occasionally p io i ising pe sonal goals o e
he public good and e en isking egula o y cap u e.14 This
bu eauc a ic inclina ion p o ided a window o oppo uni y
o he egula o y sec o , p omp ing he es ablishmen o
specialised esolu ion au ho i ies and he d a ing o in i-
ca e ules o eco e y and esolu ion planning, subsequen ly
c ea ing a demand o consul ancy.15
Le e aging his en i onmen , membe s o he p i a e sec-
o managed o pe suade policymake s o he ad an ages o
he bail-in mechanism, e ec i ely sidelining d as ic meas-
u es ha we e being conside ed a he ime, such as b eaking
5 See Ga y H S e n and Ron J Feldman, Too Big o Fail: The Haz-
a ds o Bank Bailou s (B ookings Ins i u ion P ess 2004); F ede ic S
Mishkin, ‘How Big a P oblem is Too Big o Fail? A Re iew o Ga y
S e n and Ron Feldman’s Too Big o Fail: The Haza ds o Bank Bail-
ou s’ (2006) 44 Jou nal o Economic Li e a u e 988.
6 See Geo ge J S igle , ‘The Theo y o Economic Regula ion’ (1971)
2 Bell Jou nal o Economics and Managemen Science 3–21.
7 See Jean-Jacques La on and Jean Ti ole, ‘The Poli ics o Go e n-
men Decision-Making: A Theo y o Regula o y Cap u e’ (1991) 106
Qua e ly Jou nal o Economics 1089.
8 Speci ic p o isions (Sec s.16, 20, 21, and 32) inco po a ed in o he
Banking Ac , Pub L 73–66, 48 S a 162 (1933).
9 Paul Calello, o me head o C edi Suisse’s in es men bank,
and D. Wilson E in, o me CRO o C edi Suisse, publicly claim
he in en ion o he ‘bail-in’ in ‘F om Bail-Ou o Bail-In’ [28 Janu-
a y 2010] The Economis < h p:// www. econo mis . com/ node/ 15392
186 > .
10 A w i e-o is a educ ion o liabili ies, which leads o ex ao di-
na y income, inc easing equi y.
11 A empo a y w i e-down is some imes used when no comple e o
pe manen educ ion o liabili ies is en isaged o , in o he wo ds, i a
la e ‘w i e-up’ seems possible.
12 See Ross Leckow, Alessand o Gullo and Ende Em e, ‘Bank Reso-
lu ion F amewo ks: Key Legal Design Issues’ in Simon B odie (ed),
Bank Resolu ion: Key Issues and Local Pe spec i es (INSOL In e na-
ional 2019) 10.
13 Te med a ‘ adioac i e sil e bulle ’ in Pa ick S Kenadjian’s
‘CoCos and Bail-ins’ in AR Domb e and PS Kenadjian (eds), The
Bank Resolu ion and Reco e y Di ec i e: Eu ope’s Solu ion o Too
Big o Fail? (Wal e De G uy e 2013) 231.
14 Tobias H T öge and Anas asia Ko o skaia, ‘Na ional In e es s and
Sup ana ional Resolu ion in he Eu opean Banking Union’ (1 Feb-
ua y 2023) SAFE Wo king Pape 340, Eu opean Banking Ins i u e
Wo king Pape Se ies 114/2022, 34 Eu opean Business Law Re iew
781 < h ps:// ss n. com/ abs ac = 40243 43 > ; William A Niskanen,
Bu eauc acy and Rep esen a i e Go e nmen (Aldine A he on
1971); Go don Tullock, The Poli ics o Bu eauc acy (Public A ai s
P ess 1965).
15 On he o e ly complex ules, see And ew G Haldane, ‘The Dog
and he F isbee’ (Speech a 366 h Economic Policy Symposium, Fed-
e al Rese e Bank o Kansas Ci y, 31 Augus 2012) < h ps:// www.
bis. o g/ e iew/ 1209 05a. pd > ; Tobias H T öge , ‘Too Complex o
Wo k: A C i ical Assessmen o he Bail-in Tool Unde he Eu opean
Bank Reco e y and Resolu ion Regime’ (2018) 4 Jou nal o Financial
Regula ion 35–72.
373Au oma ed bail-in: elimina ing egula o y es ain s
up he banking g oup o sepa a ing business lines,16 impos-
ing s ingen equi y capi al equi emen s,17 o limi ing he
size o banks.18 These measu es began o appea unneces-
sa y and inapp op ia e, gi en he al e na i e. Ins ead, he
FSB included he bail-in as a ocal poin in i s p oposals o
a new esolu ion egime o G-SIBs and o implemen a-
ion by he G20 membe s and o he coun ies. Concu en ly,
he FSB p oposed he issuance o ‘bail-in bonds’, ensu -
ing a c edible and easible p ocess, elying on he concep
e e ed o as TLAC19 and aligning wi h he Basel capi al
s anda ds.20
Au ho i ies sugges ed ha he bail-in should be a he
co e o he esolu ion ools o ins i u ions,21 wi h an o i-
cial o a majo esolu ion au ho i y e en e ming he bail-in
a ‘game change ’.22 Pos his accomplishmen , egula o y
discussions e e ed o he adi ional ocus on he le el o
isk posed by banks ha a socie y will ole a e, balanced
agains he essen ial c edi supply o he economy and any
o he cos s associa ed wi h i . The exigen TBTF p oblem
was hus essen ially educed o a TLAC issue. Mo eo e ,
he ci cle o people in e es ed in banking egula ion, which
included nea ly all ci izens in hei capaci y as axpaye s,
bank cus ome s, and o e s du ing he GFC, was na owed
o ‘expe ci cles’. Thus, he bail-in success ully achie ed
i s p ima y goal.
P ese ing unding cos ad an ages
Dissension o e  heimplici s a e gua an ee
Regula o y capi al equi emen s end o hinge mo e on poli -
ical discou se han scien i ic ce ain y, despi e being eiled
in an au a o echnical speci ici y ha could heo e ically
be delinea ed in an impac s udy.23 This discou se e ol es
a ound weal h dis ibu ion, whe e he in e es s o G-SIBs
(seeking low inancing cos s) clash wi h hose o deb in es-
o s (seeking isk-adequa e p icing), compe i o s (seeking o
mi iga e unjus i ied unding cos disad an ages), and ax-
paye s (seeking compensa ion o implici s a e gua an ees).
Thus, egula o s a e unce ain whe he elimina ing unjus-
i ied unding cos ad an ages o banks should ou weigh
p o i abili y conside a ions and conce ns abou mee ing
capi al equi emen s. The discussion su ounding he elie
measu es on he egula o y capi al equi emen s a he solo
en i y le el o C edi Suisse AG, he pa en bank, h ough
he so-called egula o y il e implemen ed by FINMA’s
2017 decision, highligh s his dilemma.24 Fu he mo e,
he media elease by Eu opean supe iso y and esolu ion
au ho i ies in esponse o he banking u moil o 19 Ma ch
202325 o calm he ma ke o banks’ loss-abso bing capi al
and hus o educe he isk-adequa e p emiums ha ha e jus
eme ged om he loss expe ience o AT1 in es o s in he
case o C edi Suisse,unde sco es his unce ain y.
Ne e heless, egula o y capi al ins umen s and TLAC-
eligible liabili ies should no longe ely on an implici and
uncondi ional s a e gua an ee.26 In es o s in hose ins u-
men s should be awa e o he isks associa ed wi h hei
choice and bea esponsibili y i such isks ma e ialise. This
assumes ha ma ke discipline ope a es e ec i ely, sup-
po ed by comp ehensi e isk disclosu e and app op ia e
16 Neel Kashka i, ‘Lessons om he C isis: Ending Too Big o Fail’
(Rema ks a he B ookings Ins i u ion, 16 Feb ua y 2016); Thomas
M Hoenig, ‘A Ma ke -Based P oposal o Regula o y Relie and
Accoun abili y’ (Speech a Annual Con e ence, Ins i u e o In e na-
ional Banke s, 13 Ma ch 2017).
17 Ana R Adma i and Ma in F Hellwig, The Banke s’ New Clo hes
(P ince on Uni e si y P ess 2013); Thomas M Hoenig, ‘A Ma ke -
Based P oposal o Regula o y Relie and Accoun abili y’ (Speech
a Annual Con e ence, Ins i u e o In e na ional Banke s, 13 Ma ch
2017).
18 And ew G Haldane, ‘On Being he Righ Size’ (Speech, Ins i u e
o Economic A ai s, 25 Oc obe 2012) < h ps:// www. bis. o g/ e iew/
1210 30d. pd > ; Neel Kashka i, ‘Lessons om he C isis: Ending
Too Big o Fail’ (Rema ks a he B ookings Ins i u ion, 16 Feb ua y
2016).
19 FSB, ‘P inciples on Loss-Abso bing and Recapi alisa ion Capac-
i y o G-SIBs in Resolu ion: To al Loss-Abso bing Capaci y (TLAC)
Te m Shee ’ (9 No embe 2015).
20 Common Equi y Tie 1 (CET1), AT1, and Tie 2 capi al a e sub-
jec o he Basel capi al s anda ds.
21 Deu sche Bundesbank, ‘Eu ope’s New Reco e y and Resolu ion
Regime o C edi Ins i u ions’ (2014) 66 Mon hly Repo 31–56.
22 Ka l-Philipp Wojcik, ‘Bail-in he Banking Union’ (2016) 53 Com-
mon Ma ke Law Re iew 91–138.
23 BCBS, TLAC Quan i a i e Impac S udy Repo (No embe 2015).
24 Co inne Zellwege -Gu knech , Legali y o he TBTF Decision
2017, legal opinion p epa ed on behal o he Pa liamen a y In es i-
ga ion Commission (PUK) o examine he conduc o ede al au ho i-
ies in he con ex o he eme gency me ge o CS wi h UBS (1
Decembe 2024) < h ps:// www. pa la men . ch/ cen e s/ docum en s/ de/
9.% 20Zel lwege . pd > ; U s Bi chle , E ec s o he Regula o y Fil e
on C edi Suisse, expe opinion commissioned by he Swiss Pa lia-
men a y In es iga i e Commission on he CS Eme gency Me ge (12
No embe 2024) < h ps:// www. pa la men . ch/ cen e s/ docum en s/ de/
8.% 20Bi chle . pd > .
25 ECB Banking Supe ision, Single Resolu ion Boa d and EBA,
‘ECB Banking Supe ision, SRB and EBA S a emen on he
Announcemen on 19 Ma ch 2023 by Swiss Au ho i ies’ (Join P ess
Release Eu opean Cen al Bank 20 Ma ch 2023) < h ps:// www.
banki ngsup e is ion. eu opa. eu/ p ess/ p / da e/ 2023/ h ml/ ssm. p 230
320~9 0ae 34dc5. en. h ml > .
26 Paul Da ies and Klaus J Hop , ‘Non-Sha eholde Voice in Bank
Go e nance: Boa d Composi ion, Pe o mance and Liabili y’ in D
Busch and G Fe a ini (eds), Go e nance o Financial Ins i u ions
(Ox o d Uni e si y P ess 2019) 128 pa a 6.19.

374 U.B.Lende mann
in es men ad ice ha enable in o med in es men decisions
and henego ia ion o adequa e isk p emiums. Fu he mo e,
in es o sui abili y is essen ial, as he mis-selling o hese
ins umen s can unde mine he e ec i eness o he loss-
abso bing mechanism, po en ially heigh ening he need o
a public bailou due o inancial, economic, o sociopoli ical
p essu es.
The FSB o mula ed a equi ed subo dina ion app oach
o seg ega ing all ‘ope a ing liabili ies’ om ‘capi al s uc-
u e liabili ies’ and consolida ing he la e unde TLAC o
bail-in pu poses.27 Th ee aspec s me i close examina ion.
Fi s , he p oposed subo dina ion is only es ablished is-à-
is liabili ies excluded om TLAC.28 Howe e , pa i passu is
no equi ed wi h he o he subo dina ed deb , which quali-
ies as AT1 and e en Tie 2 capi al, i applicable.29 Second,
he FSB did no exclusi ely equi e con ac ual subo dina-
ion bu also allowed o s a u o y subo dina ion.30 Thi d,
al e na i ely, bu no cumula i ely, he ins umen s could be
issued ou o a op- ie bank holding company (‘s uc u al
subo dina ion’).31
Regula o y bodies ha e been engaging in nego ia ions
o e TLAC issues. Howe e , hese nego ia ions ha e esul ed
in s a u o y measu es allowing insu icien anspa ency
ega ding TLAC-eligible liabili ies and unding s uc u es,
which impede isk-adequa e p icing, coupled wi h p e e -
en ial ax ea men , despi e he pu po ed aim o educe he
TBTF p emium ela ed o implici s a e gua an ees.
Re oac i e s a u o y subo dina ion
Va ious EU membe s a es ini ially adop ed na ional
app oaches o issuing TLAC-eligible liabili ies, c ea ing a
new laye in he c edi o hie a chy.32 Fo ins ance, in 2017,
Ge many in oduced s a u o y subo dina ion o speci ic sen-
io unsecu ed deb ins umen s in bank insol ency.33 Like-
wise, Slo enia in oduced s a u o y subo dina ion alongside
a gene al deposi o p e e ence based on a ie ed sys em. In
con as , I aly in oduced gene al deposi o p e e ence o e
non-p e e ed senio liabili ies.34 In F ance, s a u o y ecog-
ni ion o a con ac ual non-p e e ed senio deb laye was
enac ed in 2016, which was ollowed by Spain and Belgium
also adop ing simila sys ems in 2017.
The s a u o y app oaches allowed ce ain banks o imme-
dia ely mee he new TLAC equi emen s wi hou issuing
new bonds du ing he ansi ion pe iod. In pa icula , he
Ge man law had a e oac i e e ec and included bonds
al eady issued a he ime. The Ge man ede al go e nmen ’s
jus i ica ion, ci ing ‘supe io easons o inancial s abili y’,35
was an inno a i e app oach o in e ening in exis ing con-
ac ual a angemen s. Howe e , he a ec ed bondhold-
e s we e no compensa ed o hei inclusion in he TLAC
amewo k—nei he h ough highe isk p emiums om he
issue no h ough s a e compensa ion o exp op ia ion.
This may se e as an example o in e nal subsidisa-
ion wi hin public inance.36 Fi s , lawmake s educed he
implici s a e gua an ee, ul ima ely a he expense o he
indi idual bondholde s. Second, he demo ion in ank o
hese bondholde s di ec ly bene i ed o he c edi o s, who
we e no equi ed o o se hei ele a ed ank wi h a co -
esponding educ ion in isk p emiums. Thi d, o banks,
he segmen a ion o unding sou ces in o TLAC-eligible
bonds and p e e ed liabili ies is no me ely a ze o-sum
game in inance, despi e hei o e all unding cos s emain-
ing unchanged. The implici subsidy o banks lies in he
con inued unding cos ad an ages o a ec ed bonds un il
ma u i y, despi e he new law’s in en ion o elimina e he
TBTF p emium.The Ge man ini ia i e, po en ially bene i -
ing Ge man banks, was likely welcomed by o he membe
s a es, as i eased compe i ion o he sca ce pa icipan s
making up he TLAC in es o base in Eu opean capi al
ma ke s.
‘Non‑p e e ed senio ’ deb ins umen s
in heEu opean Union
Rega ding u u e e inancing ounds, s akeholde s in some
EU membe s a es ha e success ully ad oca ed o ha mo-
nising he F ench con ac ual model o non-p e e ed senio
deb ins umen s a he EU le el. The call o ha monisa ion
came in esponse o di e gen na ional app oaches ha ha e
27 FSB TLAC Te m Shee , 15, pa a 11.
28 FSB TLAC Te m Shee , 15, pa as 1, 10, 11.
29 FSB TLAC Te m Shee , 15, n 11.
30 FSB TLAC Te m Shee , 15, pa a 11, ss (a) and (b).
31 FSB TLAC Te m Shee , 15 , pa a 2, ss (b)-(c), and pa a 11, s (c).
32 See IMF, ‘Eu o A ea Policies’ IMF S a Coun y Repo s
2018/232 (July 2018) 26; Niall J Lenihan, Maike B Luede sen and
Ma in Schul e, ‘The Hie a chy o C edi o Claims in Bank Insol-
ency—Recen De elopmen s and he Ad iso y Func ions o he
Eu opean Cen al Bank’ (2016) 6 Re ue de D oi Bancai e e Finan-
cie .
33 Sec ions 46 (5) and (6) o he Ge man Banking Ac (K edi -
wesengese z) we e in oduced h ough he Resolu ion Mechanism Ac
(Abwicklungsmechanismusgese z), 2015 BGBl I a 1864, epealed
(2018).
34 Ma c Doble and o he s, ‘The Case o Deposi o P e e ence’
(IMF Decembe 2020). Howe e , o TLAC equi emen s, ope a-
ional liabili ies, such as paymen s om de i a i e con ac s,
emained on he same le el as senio unsecu ed bank deb ins u-
men s.
35 Deu sche Bundes egie ung, Go e nmen Explana o y Memo an-
dum o he D a Resolu ion Mechanism Ac (Fede al Pa liamen
Publica ion, 26 May 2015) BT-D s 18/5009, 77 (KWG). C i ically,
see Commi ee Recommenda ion (2 June 2015) BR-D s 193/1/15.
36 Richa d A Posne , ‘Taxa ion by Regula ion’ (1971) 2 Bell Jou nal
o Economics and Managemen Science 22–50.
375Au oma ed bail-in: elimina ing egula o y es ain s
exace ba ed na ional agmen a ion and c ea ed unce ain y
o issue s and in es o s. Jus as c ucial, he con ac ual
model can empowe G-SIBs in ac ically balancing cos -e i-
ciency and adhe ence o egula ions when conside ing e i-
nancing op ions. As exis ing s a u o y subo dina ed bonds
ma u e, G-SIBs can issue he p ecise amoun o ‘expensi e’
non-p e e ed s a us bonds equi ed o TLAC compliance,
while u ilising cheape p e e ed senio bonds o addi ional
unding needs. Rele an amendmen s o he Bank Reco e y
and Resolu ion Di ec i e37 equi ed membe s a es o c ea e
a legal basis o he new asse class o non-p e e ed senio
deb ins umen s issued by c edi ins i u ions by he end o
2018. This pa o he d a legisla ion was sepa a ed om
o he elemen s o he EU banking package and was gi en an
accele a ed p ocedu e,38 enabling i o come in o o ce jus in
ime o he in oduc ion o he TLAC equi emen s in 2019.
In p inciple, ha ing mul iple laye s in he wa e all de in-
ing he o de in which holde s o di e en ypes o TLAC-
eligible ins umen s (CET1, AT1, Tie 2, and TLAC-eligible
liabili ies) o a oubled bank should bea losses does no
inhe en ly pose p oblems. Simila ly, he lowe yield o
TLAC ins umen s, compa ed o ha o AT1 and Tie 2
ins umen s, does no con e a unding ad an age, p o ided
ha ma ke s p ice own unds and TLAC-eligible ins umen s
app op ia ely, acco ding o hei anking and co espond-
ing isk p o iles. Mo eo e , banking li e a u e emphasises
ha issuing mul iple inancial claims on a bank’s cash lows
aligns wi h in es o p e e ences and is, he e o e, conside ed
e icien .39
Howe e , he mo e agmen ed he c edi o hie a chy
wi hin di e en ins umen s, he g ea e he challenges
wi h ensu ing equal ea men o c edi o s, including lack
o anspa ency. No ably, he indus y uses sub le language,
a oiding he e m ‘subo dina ed’ in he con ex o p esc ib-
ing TLAC-eligible bonds’ e ms and condi ions, and e en
isk disclosu es, as he me e inclusion o his wo d could
lead o subs an ial inc eases in inancing cos s o se e al
basis poin s. This manoeu e sheds ligh on he complex
in e play be ween inancial egula ion and unding s a e-
gies, unde sco ing he impo ance o language in shaping
ma ke pe cep ions and in es o beha iou wi hin he TLAC
amewo k. Beyond hese linguis ic nuances, he oxymo-
onic combina ion o ‘non-p e e ed’40 and ‘senio ’ in he
EU legal designa ion o TLAC-eligible liabili ies41 inc eases
opaci y and may po en ially mislead in es o s.
The EU s a egy o open bank esolu ion p ima ily elied
on using ins umen s labelled wi h his e m.42 Sepa a ion
o he issuing en i y by way o issuance ou o holding com-
panies, as illus a ed below by he US concep o s uc u al
subo dina ion, is no equi ed.
‘S uc u al subo dina ion’ h oughUS bank holding
companies
In he USA, bank holding companies (BHCs) a e consid-
e ed a ‘sou ce o s eng h’ o hei ope a ing subsidia ies.43
In esolu ion, hey a e eplaced by publicly-owned b idge
banks, lea ing hei c edi o s behind, e ec i ely cons i u -
ing an economic bail-in.44 Th ough he pe emp o y esolu-
ion mechanism unde Ti le II o he Dodd-F ank Ac ,45 deb
ins umen s issued a he BHC le el a e ende ed s uc u ally
subo dina ed o senio deb om ope a ing bank subsidia -
ies, quali ying hem o TLAC. These ins umen s assume
he TLAC isks inhe en in he subsidia ies. Howe e , he
unding concep o US BHCs has long been amilia o he
capi al ma ke and a ing agencies, which may help explain
why he FSB obse ed lowe unding cos ad an ages asso-
cia ed wi h s uc u ally subo dina ed deb .46 Addi ionally,
US egula o s had a epu a ion o imposing losses on p i-
a e in es o s,47 a leas un il he Silicon Valley Bank c isis
and e en s o sp ing 2023, accoun ing o he pe cei ed like-
lihood o loss-bea ing by subo dina ed deb holde s, he eby
d i ing he obse ed di e ences in unding cos s.
Rega ding s uc u al subo dina ion, he isk associa ed
wi h opaque in a-g oup inancial ela ionships challenges
in es o s s i ing o e alua e unding s uc u es.48 This
37 Di ec i e (EU) 2017/2399, [2017] OJ L345/96.
38 Eu opean Commission, Banking Re o m: EU Reaches Ag eemen
on Fi s Key Measu es (P ess Release 25 Oc obe 2017).
39 See A noud WA Boo and Anjan V Thako , ‘Secu i y Design’
(1993) 48 The Jou nal o Finance 1349–78.
40 The in oduc ion o his e m migh be inspi ed by he e m ‘non-
cumula i e pe pe ual p e e ed s ock’ unde Basel I, see BCBS,
‘In e na ional Con e gence o Capi al Measu emen and Capi al
S anda ds’ (Ap il 1998) n 2 < h ps:// www. bis. o g/ publ/ bcbsc 111.
pd > .
41 Di ec i e (EU) 2017/2399, [2017] OJ L345/96, pa as 10–12, 14.
42 See Deu sche Bundesbank, ‘The Eu opean Banking Package –
Re ised Rules in EU Banking Regula ion’ (2019) 71 Mon hly Repo
46.
43 Bank Holding Company Ac , 12 USC § 1831o-1 (1956).
44 Randall D Guynn, ‘Resolu ion Planning in he Uni ed S a es’
in AR Domb e and PS Kenadjian (eds), The Bank Resolu ion and
Reco e y Di ec i e: Eu ope’s Solu ion o Too Big o Fail? (Wal e
De G uy e 2013) 145.
45 Pub L 111–203, 124 S a 1376 (2010).
46 See Ge man O icial Jou nal (BGBl) 2018 I a 1102 (FRG) o leg-
isla ion as o July 13, 2018. FSB, E alua ion o he E ec s o Too-
Big- o-Fail Re o ms (2021) Final Repo < h ps:// www. sb. o g/ wp-
con e n / uploa ds/ P0104 21-1. pd > .
47 See Financial C isis Inqui y Commission, The Financial C i-
sis Inqui y Repo  (US Go e nmen P in ing O ice, 2011) < h ps://
www. go in o. go / con e n / pkg/ GPO- FCIC/ pd / GPO- FCIC. pd > .
48 Paul Da ies and Klaus J Hop , ‘Non-Sha eholde Voice in Bank
Go e nance: Boa d Composi ion, Pe o mance and Liabili y’ in D
Busch and G Fe a ini (eds), Go e nance o Financial Ins i u ions
(Ox o d Uni e si y P ess 2019) 141, pa a 6.17 .
376 U.B.Lende mann
mi o s ce ain unding a angemen s in which deb is ou ed
h ough un egula ed in e media e holding companies (IHC),
ans o ming i in o equi y capi al o subsidia ies, esul ing
in double le e age. This in ica e in e play becomes mo e
complex when CET1 ins umen s a e issued o hi d pa ies
by ope a ing subsidia ies o a esolu ion g oup,49 po en ially
jeopa dising he equi y bu e o ‘senio bonds’ a he BHC
le el. While esolu ion measu es a e applied solely o he
BHC and i s c edi o s, he subsidia y emains ope a ional,
lea ing i s ex e nal in es o s una ec ed by hese measu es.
In such cases, ex e nal CET1 ins umen s issued by he
subsidia y may s ill be ou s anding and e en e ain some
alue, while senio bonds issued by he BHC a e held as
loss-abso bing. This aises doub s as o whe he he p icing
mechanism leads o in o ma ion ha can be used o e icien
ma ke esul s, alle ia ing he p ospec o a public bailou .50
Pe sis ing ax p e e ences o TLAC‑eligible
liabili ies
The gene al deba e posi ions a ound he p e e en ial ax
ea men o deb in banks a e well es ablished in bo h aca-
demic li e a u e51 and p ac ice.52 TLAC-eligible liabili ies
align wi h adi ional hyb id inancing ins umen s, ma -
ke ed as deb o ax au ho i ies and in es o s while simul a-
neously p esen ed as loss-abso bing capaci y o egula o s
and a ing agencies.53 Gi en his, he US In e nal Re enue
Se ice has in oduced a - eaching excep ions om he
Base E osion and An i-Abuse Tax (BEAT) o in e es on
in e nal TLAC-eligible ins umen s issued c oss-bo de o
o he g oup en i ies.54 Th ough he BEAT, US lawmake s
aimed o limi p o i educ ions when US companies made
paymen s ab oad. In con as , TLAC-eligible ins umen s
mus be issued o pa en companies ab oad, ou -s eaming
losses om he USA in he e en o de aul . Unde he BEAT
exemp ion, howe e , TLAC-eligible ins umen s can se e
as ehicles o ou -s eam p o i s o low- ax ju isdic ions ia
high coupon paymen s.
Fu he mo e, he UK go e nmen lobbied success ully
o exemp inancial se ices om he minimum ax o he
OECD/G20 Base E osion and P o i Shi ing P ojec in
2021.55 The OECD a gued ha p uden ial egula ion, such
as bank o insu ance licensing equi emen s designed o p o-
ec local deposi o policy holde s in he ma ke ju isdic ion,
ypically ensu es ha esidual p o i s a e ealised mainly in
local cus ome ma ke s.56 The e o e, i subs an ial in e es
paymen s a e made by US subsidia ies on in e nal TLAC o
a pa en company based in London, such ansac ions would
be exemp om he BEAT, and he UK would no impose
any minimum co po a e income ax.
No leas , TLAC-eligible liabili ies la gely con inue o
bene i om a ious na ional ax p e e ences ha a e com-
monly p o ided o deb capi al, which in many ju isdic-
ionse en ex end o AT1 ins umen s.57 This app oach is
conside ed easonable, as i aims o s imula e he TLAC
ma ke . The e is, howe e , a ade-o be ween he ax
deduc ibili y o coupons and supe iso y equi emen s58 as
49 This is pe missible acco ding o he FSB TLAC Te m Shee , pa a
8, s (a).
50 Tobias H T öge , ‘Too Complex o Wo k: A C i ical Assessmen
o he Bail-in Tool Unde he Eu opean Bank Reco e y and Resolu-
ion Regime’ (2018) 4 Jou nal o Financial Regula ion 35–72.
51 AR Adma i and o he s, ‘Fallacies, I ele an Fac s, and My hs
in he Discussion o Capi al Regula ion: Why Bank Equi y is No
Socially Expensi e’ (2013) S an o d Uni e si y School o Business
Resea ch Pape 2065; Ma kus B unne meie and o he s, ‘The Fun-
damen al P inciples o Financial Regula ion’ Gene a Repo s on he
Wo ld Economy 11 (In e na ional Cen e o Mone a y and Banking
S udies and Cen e o Economic Policy Resea ch, June 2009) 33 .;
Neel Kashka i, ‘Lessons om he C isis: Ending Too Big o Fail’
(Rema ks a he B ookings Ins i u ion, 16 Feb ua y 2016).
52 IMF and OECD s a , wi h inpu om s a o he o he o ganisa-
ions pa icipa ing in he ITD2009, d a ed ‘Financial Ins i u ions and
Ins umen s—Tax Challenges and Solu ions’ (Pape o he In e na-
ional Tax Dialogue Con e ence, Oc obe 2009). IMF, ‘Deb Bias
and O he Dis o ions—C isis-Rela ed Issues in Tax Policy’ (2009)
IMF Boa d Pape . See also FSB, Final Repo on Co po a e Funding
S uc u es and Incen i es (28 Augus 2015) 11 and Annex C.
53 IMF and OECD, ‘Financial Ins i u ions and Ins umen s—Tax
Challenges and Solu ions’ (Pape o he In e na ional Tax Dialogue
Con e ence, Oc obe 2009) 18.
54 26 CFR § 1.59A-3(b)(3)( ).
55 See ‘Pilla One’ in OECD, S a emen on a Two-Pilla Solu ion o
Add ess he Tax Challenges A ising F om he Digi aliza ion o he
Economy (OECD/G20 Base E osion and P o i Shi ing P ojec , 1
July 2021). Howe e , he IMF s a ed ha he exclusion o egula ed
inancial se ices migh need o be econside ed. IMF, ‘In e na ional
Co po a e Tax Re o m’ (2023) Policy Pape 2023/001, 53.
56 OECD, ‘OECD Sec e a y-Gene al Tax Repo o G20 Finance
Minis e s and Cen al Bank Go e no s: Saudi A abia’ (July 2020).
57 Ge man Fede al Minis y o Finance, ‘Le e Conce ning he
Income Tax T ea men o he Sample Condi ions o he Fede al Asso-
cia ion o Ge man Banks o Ins umen s o Addi ional Co e Capi al
Acco ding o A . 51 e seq.’ (10 Ap il 2014) CRR Adminis a i e
Ins uc ion, IV C 2—S 2742/12/10003:002. Unde Du ch law (a icle
29a o he Co po a e Tax Ac ), a simila p e e ence has been abol-
ished as o 1 Janua y 2019. Fo an o e iew, see Cli o d Chance,
‘Tax T ea men o AT1 and RT1 Ins umen s Issued by Banks and
Insu e s in Ce ain Eu opean Ju isdic ions’ (July 2022) < h ps://
www. cli o dch ance. com/ con e n / dam/ cli o dch ance/ b ie i ngs/ 2018/
07/ ax- ea men - o - a 1- and- 1- ins umen s- issued- by- banks- and-
insu e s- in- ce a in- eu op ean- ju is dic i ons. pd > .
58 Deu sche Bundesbank, ‘Con ingen Con e ible Bonds: Design,
Regula ion, Use ulness’ (2018) 70 Mon hly Repo 61.
377Au oma ed bail-in: elimina ing egula o y es ain s
well as issues unde s a e aid law.59 Today, he p e e en ial
ea men in ax law incen i ises bank managemen o mee
TLAC equi emen s h ough deb ins umen s a he han
CET1 capi al o ully exhaus any unding cos ad an ages.
In oducing ano el egula o y p e e ence
o exis ing senio deb
TLAC di e ges om he BCBS’s objec i e o enhancing he
‘quali y, consis ency, and anspa ency o he capi al base’.60
TLAC-eligible liabili ies, o he han eligible egula o y capi-
al ins umen s, a e o lowe quali y han he o me Tie 3
capi al.61 TLAC-eligible liabili ies come a a lowe cos o
banks han egula o y capi al, ega dless o any p og ess on
mi iga ing he unding cos ad an ages o G-SIBs, as was
sugges ed in he FSB’s e alua ion o he e ec s o TBTF
e o ms in 2021. These indings ha e been assessed and con-
ex ualised by a ious s udies.62
Despi e i ha ing lowe loss-abso bing capaci y han eg-
ula o y capi al, he FSB e enexpec s TLAC o consis o a
leas 33 pe cen o eligible deb capi al,63 ha ing become
an obliga ion o G-SIBs unde US law.64 The o igin o his
solu ion can be ound in he concep o an ‘in e nal esolu-
ion und’ and in he igge calib a ion. In case o de aul ,
he e should be a su icien le el o TLAC-eligible liabili ies
emaining o which a bail-in can be applied. On he con-
a y, i a bank we e o comple ely and exclusi ely mee he
TLAC equi emen wi h CET1, esolu ion p oceedings on
such a bank would ha e o be ini ia ed i i d opped below
a CET1 a io o 18 pe cen o isk-weigh ed asse s (RWA)
o a CET1 a io o 6.25 pe cen o he o al le e age a io
exposu e, which de e mine he egula o y minimum h esh-
olds o TLAC.
Indus y ep esen a i es el his would des oy a
well-capi alised bank in he o dina y cou se o business.
Howe e , he conce n o e an o e ly p ema u e esolu ion
igge is la gely un ounded, as TLAC s anda ds now hold
equal impo ance alongside egula o y capi al equi emen s,
and bo h he FSB Key A ibu es 3.1 and A icle 18(4)(a)
o he Eu opeanSingle Resolu ion Mechanism Regula ion
(SRMR)65 equi e esolu ion o be ini ia ed well be o e
TLAC h esholds a e b eached. Despi e his, coun e -a gu-
men s ha e ailed o dispel he p e ailing na a i e. Conse-
quen ly, policymake s now p e e deb o e equi y, and he
egula o y p ocess is being aken o ex emes wi h a gumen-
a ion ha supe icially appea s plausible. Close examina-
ion e eals, howe e , ha in oducing TLAC egula ions in
he EU and USA allowed G-SIBs o p oceed wi hou making
undamen al adjus men s o hei unding s uc u e.
P ese ing hebanking g oup s uc u e
Na iga ing poli ical eali ies inin e na ional
coope a ion
The cu en esolu ion amewo k appea s o p io i ise he
objec i es o banks in p ese ing hei global anchise
while ailing o mee i s in ended pu pose o e ec i ely
esol ing ansna ional banking g oups. These g oups ben-
e i om economies o scale h ough cen al easu y unc-
ions, cash pooling, and o he cen al se ices. Howe e ,
ensions be ween in e na ional coope a ion and na ional
iscal capabili ies and in e es s a ise. Conside ing poli ical
eali ies, i is a ional o poli icians o p io i ise he in e es s
o domes ic o e s and axpaye s (home bias).66 Rega ding
hese eali ies, he FSB did no ocus solely on he inancial
g oup (as he BCBS does)67 bu s a ed conside ing i s sub-
g oups and in a-g oup ela ionships as well. Depending on
he esolu ion s a egy, esolu ion au ho i ies can apply a
single poin o en y (SPE) s a egy o a single esolu ion
g oup o a mul iple poin s o en y (MPE) s a egy o mul-
iple esolu ion g oups.68 The TLAC equi emen s apply o
each esolu ion g oup on a consolida ed o sub-consolida ed
basis. E en in an SPE s a egy scena io, he FSB imposes
‘in e nal TLAC’ equi emen s o main ain a allback posi ion
should he home supe iso o esolu ion au ho i y ac ‘bad
o mad’; ha is, ega dless o whe he hey a e able o do so,
59 See EU Commission Suppo Measu e SA. 43,504—Tax ea men
Con ingen con e ibles (Coco’s) in he Ne he lands (Le e , 1 Ma ch
2018) COMP H3/VS/h ds D* 010289/2018 < h ps:// docs. google.
com/ docum en /d/ 11xjo ecxnK KGTwV HdgKV Kk 98 GZg0b 7RUuq
IDkc3 hcA/ edi > .
60 Basel III, pa a A1.
61 Tie 3 was a egula o y capi al elemen in oduced unde Basel
I.5 and abolished unde Basel III, pa a9. I consis ed o subo dina ed
bonds wi h an o iginal ma u i y o a leas 2yea s o co e ma ke
isk.
62 Fo example, I ene Pablos Nue o, ‘Has he New Bail-in F ame-
wo k Inc eased he Yield Sp ead Be ween Subo dina ed and Senio
Bonds?’ (2020) 26 Eu opean Jou nal o Finance 1781–97; Ma in F
Hellwig, ‘Twel e Yea s A e he Financial C isis—Too-Big- o-Fail
is S ill wi h Us’ (2021) 7 Jou nal o Financial Regula ion 175–87.
63 FSB TLAC Te m Shee , pa a 6.
64 This is a long- e m deb equi emen unde 12 CFR § 252.62.
Howe e , unde EU law, any pa o eligible liabili ies can be com-
ple ely me wi h CET1, acco ding o Council Regula ion (EU)
2019/877, ec 7.
65 Regula ion (EU) No 806/2014, OJ L 225, 30.7.2014, p. 1–90.
66 Unequal ea men wi hin he con ex o so e eign deb es uc u -
ing was obse ed by Fede ico S u zenegge and Je omin Ze elmeye
in ‘Hai cu s: Es ima ing In es o Losses in So e eign Deb Res uc-
u ings, 1998–2005’ (2005) IMF Wo king Pape WP/05/137, 63.
67 Basel II, pa a 20; Basel III, pa a 47.
68 FSB, ‘Reco e y and Resolu ion Planning o Sys emically Impo -
an Financial Ins i u ions: Guidance on De eloping E ec i e Reso-
lu ion S a egies’ (16 July 2013) < h ps:// www. sb. o g/ wp- con e n /
uploa ds/ _ 13071 6b. pd > .
384 U.B.Lende mann
Time inconsis ency p oblem
The decision-make s ace he ul ima e dilemma o achie -
ing wo undamen ally incompa ible esolu ion goals simul-
aneously: main aining inancial s abili y on he one hand
and a oiding a bailou on he o he . Re u ning o he a ion-
ale behind he bail-in ool, i can be a gued ha p e-c isis
c edibili y—o a leas cons uc i e ambigui y ega ding
c edi o s’ loss-sha ing—could su ice o es ablish ex an e
incen i es, educe mo al haza d, and limi implici s a e
gua an ees, he eby se ing he public in e es .
As p e iously shown, howe e , when a eal-li eapplica-
ion a ises, poli icians migh —p agma ically, albei incon-
sis en ly—op o a bailou o p ese e inancial s abili y.
A his junc u e, he p e ailing a ionale sugges s ha he
an icipa ed iscal implica ions bo ne by axpaye s o such
in e en ions may be less consequen ial han he unp edic -
able economic epe cussions o a bail-in. None heless, i
mus also be conside ed ha a bail-in may yield ex pos e i-
cien ou comes, as i a oids he use o public unds and ein-
o ces he inhe en isk-sha ing mechanism.122 Howe e , he
second- ound e ec s igge ed by a bail-in could unde mine
his e iciency, alongside he legal isks and complexi ies
in ol ed, which may ou weigh he e o equi ed o ob ain
pa liamen a y app o al o apping in o public budge s.
I is also impo an o no e ha policymake s, while cog-
nisan ha a bailou p eceden unde mines he u u e c ed-
ibili y o a bail-in s a egy, mus accoun o he need o
ees ablish ma ke access o e inancing ounds immedi-
a ely ollowing he ‘ esolu ion weekend’. The legal heo y o
inance p oposed by Pis o posi s ha s ic en o cemen o
con ac s becomes inc easingly challenging du ing a inan-
cial c isis123; so ends he p ospec o a bail-in o all away
a he apex. In sys emic scena ios, policymake s o en ind
hemsel es wi h no iable al e na i e bu o o ches a e a
public bailou .
The de elopmen o a sui able esolu ion egime, how-
e e , encompasses no only how i should unc ion in no -
ma i e e ms bu also how i is expec ed o ope a e in eal-
wo ld scena ios. This dual pe spec i e edi ec s a en ion
owa ds he esponsibili y and u ili y unc ions o policy-
make s who a e cha ged wi h implemen ing such measu es.
I mo es beyond he o mal, echnical objec i es o bank
esolu ion, highligh ing he signi ican ole o human ac o s
and judgemen in he decision-making p ocess.124 F om he
pe spec i e o esponsible isk a e sion in sa egua ding
he public in e es , poli ical leade s will end o eschew he
inhe en haza ds and complexi ies associa ed wi h bail-in
measu es, g a i a ing owa ds he os ensibly secu e inan-
cial bailou ins ead. Public choice heo y p o ides addi ional
insigh s by highligh ing he indi idual poli ical cos s poli i-
cians ace, such as he isk o endange ing hei e-elec ion.
Con e sely, he iscal bu den’s impac has less signi icance
o he poli ician when amo ised ac oss a b oad spec um o
s akeholde s and can be secu i ised in o u u e iscal pe iods,
o en ex ending beyond he enu e o he legisla i e ac o s—
a phenomenon e oca i e o wha Be ns ein once called a
‘concen a ed bene i s–di use cos s s o y’.125
In conclusion, i is e iden ha public decision-make s
will emain en enched in he TBTF dilemma.126 Despi e
no ma i e aspi a ions o e icien esolu ion s a egies,
p ac ical eali ies and poli ical conside a ions equen ly
s ee policymake s owa ds bailou s, pe pe ua ing he chal-
lenges o esol ing inancial c ises e ec i ely. This ou come
sugges s he s ong likelihood ha lobbying e o s led o
egula o y cap u e,127 as he inancial indus y success ully
p omo ed he in oduc ion o he bail-in ool. By doing so, i
la gely p ese ed he implici s a e gua an ee and he associ-
a ed unding cos ad an ages o G-SIBs, u he en enching
hei sys emic impo ance while sides epping s ic e meas-
u es necessa y o e ec i ely add ess he TBTF p oblem.
P oposal o enhancing TLAC‑eligible
liabili ies
This s udy has demons a ed ha he egula o y p ocess
complexi ies and he changing in e es s o egula o s du -
ing c ises make i challenging o ind a p ac ical solu ion
122 See Thomas Philippon and Aude Salo d (eds), ‘Gene a Special
4: Bail-Ins and Bank Resolu ion in Eu ope’ (CEPR P 2017) < h ps://
cep . o g/ publi ca io ns/ books- and- epo s/ gene a- speci al-4- bail- ins-
and- bank- esol u ion- eu ope > .
123 Ka ha ina Pis o , ‘A Legal Theo y o Finance’ (2013) 41 Jou nal
o Compa a i e Economics 315.
124 Some au ho s a gue, howe e , ha e en o icials wi hin supe i-
so y au ho i ies may be d i en enough by sel -in e es o ail o ake
app op ia e measu es. Tobias H T öge and Anas asia Ko o skaia,
‘Na ional In e es s and Sup ana ional Resolu ion in he Eu opean
Banking Union’ (1 Feb ua y 2023) SAFE Wo king Pape 340, Eu o-
pean Banking Ins i u e Wo king Pape Se ies 114/2022, 34 Eu opean
Business Law Re iew 781 < h ps:// ss n. com/ abs ac = 40243 43 > .
125 Ma e H Be ns ein, Regula ing Business by Independen Com-
mission (P ince on 1955).
126 See Cha les Goodha and Emilios A gouleas, ‘A C i ical E alu-
a ion o Bail-In as a Bank Recapi aliza ion Mechanism’ (2014) Dis-
cussion Pape 10,065; Je ey N Go don and Wol -Geo g Ringe,
‘Bank Resolu ion in Eu ope: The Un inished Agenda o S uc u al
Re o m’ in Danny Busch and Guido Fe a ini (eds) Eu opean Bank-
ing Union (Ox o d Uni e si y P ess 2015) ch 15.
127 Lobbying e o s o en play a la ge ole in ‘ egula o y cap u e’,
whe e egula o y agencies ac in he in e es o in luen ial g oups
a he han he public. See Jean-Jacques La on and Jean Ti ole, ‘The
Poli ics o Go e nmen Decision-Making: A Theo y o Regula o y
Cap u e’ (1991) 106 Qua e ly Jou nal o Economics 1089–1127.

385Au oma ed bail-in: elimina ing egula o y es ain s
o he TBTF p oblem. Based on hese assump ions, e o s
should be made o mi iga e he p oblem by imp o ing he
in e na ional TLAC de ini ion o G-SIBs on he FSB le el.
The e o e, i is ecommended ha au ho i ies’ con ol o e
ini ia ing he esolu ion p ocess be educed and a manda o y
igge ing mechanism wi h limi ed disc e ion in oduced.128
The ension be ween ule-based app oaches and lexibili y
in handling speci ic sys emic e en s is well ecognised.129
The legal heo y o inance sugges s suspending he legal
en o cemen o con ac s ha ope a e as inancial asse s
when he su i al o he sys em is a s ake, pa icula ly a he
apex o a c isis.130 While Pis o ’s conclusion emphasises ha
lexibili y migh be necessa y o a oid ex ao dina y isks, i
would be pa icula ly pa adoxical o he c isis managemen
amewo k o be suspended p ecisely du ing a inancial c i-
sis. Flexibili y is de imen al o he c edibili y o he bail-in
appa a us, which is c ucial o ex an e incen i es, cu bing
mo al haza d and p opensi y o eso o go e nmen gua -
an ees. Ensu ing p i a e sec o loss abso p ion ad ances ex
pos e icien loss-sha ing and se es o enhance c edibili y.
The policy ade-o s should be conside ed, howe e , as pub-
lic au ho i y in ol emen in assessing he inancial heal h
and ac i a ing loss abso p ion should be minimised o a oid
egula o y o bea ance on he one hand and o p e en s a e
liabili y o w ong ul execu ion on he o he .
The e o e, he igge o TLAC-eligible ins umen s
should be au oma ic, ea ly, easy o assess, quick o adop ,131
and con ac ual, acili a ing compliance wi h he sol ency
c i e ia o ensu e access o ELA. The app oach should aim
o cla i y he c edi o hie a chy and educe complexi y and
opaci y while minimising unjus i ied ax p e e ences o
TLAC-eligible ins umen s. The clause should be supple-
men ed wi h a liquidi y igge ha ac i a es in case o ELA
p o isioning om cen al banks. Finally, pa allel meas-
u es should be implemen ed o impose limi a ions on asse
encumb ance o acili a e he colla e alisa ion o ELA.
Sha e p ice igge
To ensu e e ec i e loss abso p ion, ma ke -based igge
concep s, as sugges ed by Flanne y,132 Pennacchi, Ve -
maelen and Wol ,133 o Sunda esan and Wang,134 among
o he s, a e a ou ed o inclusion in he TLAC Te m Shee .
The mo e he igge ing p ocess is pe cei ed as anspa -
en and ee om bias, he g ea e he accep ance o loss
abso p ion, he lowe he isk o li iga ion, and he highe he
likelihood o ees ablishing ma ke access in he a e ma h.
Mo eo e , c edibili y can bes be eached h ough an au o-
ma ic igge mechanism, as is powe ully demons a ed by
he p inciples o mili a y de e ence.
The igge mechanism should be designed o align wi h
scena ios such as e oding ma ke con idence. The h eshold
da a should be eadily a ailable on a daily basis and easily
accessible o he public. These condi ions a e bes me by
a sha e p ice igge based on o icial s ock ma ke da a,
no wi hs anding i s d awbacks.135 While sha e p ice ig-
ge s a e commonly used in manda o y con e ible bonds o
knock-ou ce i ica es, hey a e c i icised when applied o a
la ge olume o AT1 ins umen s. Despi e conce ns abou
he po en ial isk o abuse and ‘dea h spi al’ associa ed wi h
using a ma ke -based igge ,136 as well as p icing unce -
ain y and weal h ans e om deb o equi y,137 hese con-
ce ns should be gi en less weigh han ensu ing he sa e y
and e ec i eness o TLAC-eligible liabili ies when igge ed
o eco e y pu poses o p e en de aul .
128 Pa ick Bol on, Wei Jiang and Anas asia Ka ashe a ad oca e
o educed disc e ion as well in ‘The C edi Suisse CoCo Wipeou :
Fac s, Mispe cep ions, and Lessons o Financial Regula ion’ (2023)
35 Jou nal o Applied Co po a e Finance 66.
129 Dal inde Singh, ‘The UK Banking Ac 2009, P e-Insol ency
and Ea ly In e en ion: Policy and P ac ice’ (11 No embe 2010)
Jou nal o Business Law, Wa wick School o Law Resea ch Pape
27/2010 < h ps:// ss n. com/ abs ac = 17074 06 > .
130 Ka ha ina Pis o , ‘A Legal Theo y o Finance’ (2013) 41 Jou nal
o Compa a i e Economics 315.
131 See also Edoa do D. Ma ino, Casimi o An onio Nig o, and Tom
Vos, in ‘CoCos in Eu ope: Wha Is W ong – and How o Fix I ?’ (29
Ap il 2024) Eu opean Banking Ins i u e Wo king Pape Se ies 169,
Ams e dam Law School Resea ch Pape 18/2024, Ams e dam Cen e
o Law & Economics Wo king Pape 09/2024 < h ps:// ss n. com/
abs ac = 48107 61 > .
132 Ma k J Flanne y, ‘No Pain, No Gain? E ec ing Ma ke Discipline
ia “Re e se Con e ible Deben u es”’ in Hal S Sco (ed), Capi al
Adequacy beyond Basel: Banking, Secu i ies, and Insu ance (Ox o d
Uni e si y P ess 2005); Ma k J Flanne y, ‘S abilizing La ge Finan-
cial Ins i u ions wi h Con ingen Capi al Ce i ica es’ (1 Ma ch 2010)
CAREFIN Resea ch Pape 04/2010 < h ps:// ss n. com/ abs ac =
17986 11 > .
133 Geo ge G Pennacchi, Theo Ve maelen and Ch is ian C P Wol ,
‘Con ingen Capi al: The Case o COERCs’ (23 Decembe 2011)
INSEAD Wo king Pape 2011/133/FIN < h ps:// ss n. com/ abs ac =
16569 94 > .
134 Su esh Sunda esan and Zhenyu Wang, ‘On he Design o Con in-
gen Capi al wi h a Ma ke T igge ’ (2015) 70 The Jou nal o Finance
881–920.
135 S e an A djie , Anas asia Ka ashe a and Bilyana Bogdano a,
‘CoCos: A P ime ’ (Sep embe 2013) BIS Qua e ly Re iew 43;
Deu sche Bundesbank, ‘Con ingen Con e ible Bonds: Design, Reg-
ula ion, Use ulness’ (2018) 70 Mon hly Repo Ma ch 53.
136 Cha les Goodha , ‘A e CoCos om Cloud Cuckoo-Land?' (10
June 2010) < h ps:// cep . o g/ oxeu/ colum ns/ a e- cocos- cloud- cuckoo-
land > ; S e an A djie , Anas asia Ka ashe a and Bilyana Bogda-
no a, ‘CoCos: A P ime ’ (Sep embe 2013) BIS Qua e ly Re iew
43.
137 Su esh Sunda esan and Zhenyu Wang, ‘On he Design o Con in-
gen Capi al wi h a Ma ke T igge ’ (2015) 70 The Jou nal o Finance
881–920.
386 U.B.Lende mann
The calib a ion o he sha e p ice igge ep esen s he
mos signi ican challenge. I should ensu e i s h eshold
is ea ly enough o allow imely eac ions. This p oposal
acknowledges ha signi ican esolu ion measu es mus be
aken du ing he eco e y phase o p e en a de aul e en ,
e en i no explici ly e e ed o as such. Ea ly igge s a e
essen ial o c ea ing he necessa y b ea hing space o
imely eo ganisa ion in a going-conce n scena io, help-
ing o p ese e anchise alue. This s udy ad oca es o a
s aigh o wa d app oach: se ing he sha e p ice igge a a
ixed minimum h eshold whe e he bank’s sha es quali y as
penny s ocks, as de ined by he US Secu i ies and Exchange
Commission (SEC)—companies ading o less han 5 US
dolla s pe sha e.138 While his app oach may ace c i icism
o i s simplici y compa ed o mo e sophis ica ed p oposals,
such as hose inco po a ing ma ke - o-book alue a ios139
o dynamic p ice ends, he penny s ock le el ep esen s a
well-known psychological h eshold. I p o ides a quick and
easy assessmen , equi ing no eliance on complex calcula-
ions, in e media e s eps, o hi d-pa y in ol emen , making
i a p ac ical and independen benchma k. Fu he mo e, he
likelihood o manipula ion o misconduc d i ing a sha e
p ice o a le el classi ied as a penny s ock is ela i ely low.
Se e al e en s suppo he p oposed h eshold. Fo exam-
ple, C edi Suisse G oup en e ed penny s ock s a us on 15
July 2022, when i s sha e p ice dipped o an in a-day low
o 4.99 Swiss ancs on he Swiss S ock Exchange.140 F om
1 Sep embe 2022 onwa d, he sha e p ice consis en ly ho -
e ed a ound a 5 Swiss ancs h eshold,141 u he highligh -
ing i s signi icance as a c i ical benchma k.
Be o e i s collapse in Ma ch 2023, Silicon Valley Bank’s
s ock p ice sha ply declined om mo e han 100 dolla s pe
sha e on 9 Ma ch 2023 o below 1 dolla pe sha e om 28
Ma ch 2023 onwa d, a e a pe iod o suspended ading.142
Fi s Republic Bank immedia ely ell om wo-digi sha e
p ices o an in a-day low o 4.76 dolla s pe sha e on 26
Ap il 2023, and consecu i ely closed below ha le el om
3 May onwa d.143
An ea lie example is p o ided by Bea S ea ns, whose
s ock p ice plumme ed om 30.85 dolla s pe sha e on 14
Ma ch 2008 o penny s ock le els by 17 Ma ch 2008, when
i aded a an in a-day low o 2.84 dolla s and closed a
4.81 dolla s pe sha e.144 O e ha weekend, Bea S ea ns’
acquisi ion by JP Mo gan Chase was al eady announced a
an ini ial p ice o 2 dolla s pe sha e, which was la e e ised
o 10 dolla s pe sha e.145
A e a ola ile week, ading a ound o below 10 dolla s
pe sha e, Lehman B o he s’ s ock eached penny s ock le -
els on 15 Sep embe 2008, opening a 0.89 dolla s, closing a
0.23 dolla s pe sha e, and emaining below ha le el o he
u u e.146 T igge ing TLAC-eligible liabili ies a his junc-
u e migh no ha e p esen ed a clea eco e y scena io hose
days, as Lehman B o he s Holdings—as he only bank o do
so du ing he GFC—announced i s Chap e 11 bank up cy
iling on he ea ly mo ning o 15 Sep embe 2008.
Ci ig oup’s s ock p ice ell sha ply du ing he end o he
GFC, ading a an in a-day low o 4.44 dolla s pe sha e on
14 Janua y 2009, and emained a a penny s ock le el un il
2011.147 Bank o Ame ica saw i s sha es dip below 5 dol-
la s du ing he c isis as well, ading a an in a-day low o
4.62 dolla s pe sha e on 4 Feb ua y 2009 and subsequen ly
eco e ing,148 possibly due o he public bail-ou measu es.
Con e sely, Lloyds Banking G oup had al eady allen
in o penny s ock e i o y long be o e he GFC,149 while
UBS did no each penny s ock le els150—despi e, o pe -
haps because o , s a e in e en ion du ing he GFC.
This analysis unde sco es he impo ance o ca e ul
igge design, balancing ea ly in e en ion wi h p ac ical
conside a ions. This s udy aligns wi h wo k by Pe o i and
Ma ino, who a gue ha supe iso s lack e ec i e ools
and incen i es o ea ly in e en ion, p ima ily due o ea s
o igge ing bank uns, and p opose p e-emp i e pa ial
bail-ins o in es o s o uninsu ed deposi o s as s abilising
measu es du ing signi ican ou lows.151 Mee ing s ock p ice
h esholds in a going-conce n scena io would no di ec ly
igge a ca as ophic e en o he espec i e bank. Ins ead,
i would au oma ically bols e equi y capi al h ough he
con e sion o w i e-o o TLAC-eligible liabili ies, he eby
138 See 17 CFR § 240.3a51-1.
139 Geo ge G Pennacchi, Theo Ve maelen and Ch is ian C P Wol ,
‘Con ingen Capi al: The Case o COERCs’ (23 Decembe 2011)
INSEAD Wo king Pape 2011/133/FIN < h ps:// ss n. com/ abs ac =
16569 94 > .
140 Da a acqui ed h ough LSEG.
141 Da a acqui ed h ough LSEG.
142 Da a acqui ed h ough LSEG.
143 Da a acqui ed h ough LSEG.
144 Da a acqui ed h ough LSEG.
145 And ew Ross So kin, ‘JP Mo gan Pays $2 a Sha e o Bea
S ea ns ‘ The New Yo k Times (17 Ma ch 2008) < h ps:// www. ny im
es. com/ 2008/ 03/ 17/ busin ess/ 17bea . h ml > .
146 Da a acqui ed h ough LSEG.
147 Da a acqui ed h ough LSEG.
148 Da a acqui ed h ough LSEG.
149 Emma Dunkley and Pa ick Jenkins, ‘How Lloyds Came Back
om he B ink’ Financial Times (17 May 2017) < h ps:// www. .
com/ con e n / 34e57 e76- 3a87- 11e7- 821a- 6027b 8a20 23 > .
150 Da a acqui ed h ough LSEG.
151 En ico C Pe o i and Edoa do D Ma ino, ‘Con aining Runs on
Sol en Banks: P io i izing Reco e y O e Resolu ion’ (16 Feb ua y
2024) Ams e dam Law School Resea ch Pape 05/2024, Ams e dam
Cen e o Law & Economics Wo king Pape 02/2024 < h ps:// ss n.
com/ abs ac = 47291 10 > .
387Au oma ed bail-in: elimina ing egula o y es ain s
add essing ma ke doub s. Conce ns abou ad e se ma ke
eac ions should no de e he implemen a ion o a ma ke -
based igge mechanism, as a sha e p ice decline is an una-
oidable consequence in he absence o e ec i e mi iga ion
measu es.
The p oposed ma ke -based igge imp o es sol ency
assu ance by le e aging declining sha e p ices o coun e -
ac nega i e isk pe cep ions. Es ablishing his mechanism
would enhance anspa ency and ein o ce he TLAC in es-
o base’s unde s anding ha his unique hyb id ins umen
ope a es simila ly o equi y sha es and is exposed o asso-
cia ed isks o losses in a inancial c isis. TLAC-eligible
ins umen s a e de alued p io o he igge e en being
eached, and he s ock p ice aligns wi h CET1 ins umen s
be o ehand—simila o knock-ou ins umen s o manda o y
con e ibles.
A ma ke -based sha e p ice igge , i implemen ed, could
ha e in luenced managemen ’s go e nance and beha iou
by encou aging p oac i e measu es o mi iga e isks o p o-
spec i e acqui e s engaging in excessi e ba gaining o coe -
ci e ac ics. Such a igge would incen i ise managemen
o main ain a subs an ial bu e abo e penny s ock le els,
e ec i ely aligning he p ese a ion o sha eholde alue
wi h he objec i es o banking egula ion. Supe iso s, in
u n, should be encou aged o p oac i ely an icipa e ma ke
mo emen s.
Howe e , he e is also a po en ial o misuse o his mech-
anism, and i is ad isable o mi iga e his by inco po a ing
con ac ual sa egua ds. Fo ins ance, implemen ing obse a-
ion pe iods o wo days o one week can p o ide a bu e
o assess s abili y, ensu ing he mechanism is no igge ed
p ema u ely in he absence o sha p declines, ading suspen-
sions, o public in e en ions du ing ha ime.
Liquidi y igge
ELA om cen al banks emains indispensable and he mos
p essing conce n in a banking c isis. The C edi Suisse case
has disp o en he no ion ha a capi al inc ease is unsui -
able o add essing liquidi y issues. Despi e being dis inc in
heo y, liquidi y and capi al a e in e connec ed in p ac ice.
Fo cen al banks, i is no jus i iable o p o ide ELA o an
insol en bank. Ins ead, he bank mus emain a going con-
ce n o quali y. To ensu e his, i is ecommended o in o-
duce an addi ional igge speci ically sui ed o si ua ions
whe e banks apply o ELA unde he newly es ablished
sol ency c i e ia wi hin he Eu osys em’s ELA amewo k.
Unde his amewo k, ELA can now be ex ended o banks
ha ail o mee he ha monised minimum egula o y own
unds equi emen s, ‘i he e is a c edible p ospec o ecapi-
alisa ion […] by which ha monised minimum egula o y
own unds le els would be es o ed wi hin 24weeks a e
he end o he e e ence qua e o he da a ha showed ha
he bank does no comply wi h ha monised egula o y mini-
mum s anda ds; in duly jus i ied, excep ional cases he Go -
e ning Council may decide o p olong he g ace pe iod o
24weeks.’152 T igge ing he con ibu ion o TLAC-eligible
ins umen s o CET1 i ems may lead o a c edible p ospec
o ecapi alisa ion by way o es o a ion o he own unds
le el in his sense, he eby indi ec ly enhancing he liquid-
i y posi ion as i es ablishes he necessa y condi ions o
accessing ELA.
Liquidi y is o en equi ed in he o m o o eign cu -
ency as well. Howe e , in he case o smalle coun ies,
whe e banks a e oo big o sa e, his suppo will no e en
be ex ended h ough swap ansac ions wi h he espec i e
cen al bank. A i s apex, he C edi Suisse case inally high-
ligh ed he lack o ELA om he Fed o he g oup’s US
en i ies, and he demand o US dolla -denomina edliquid-
i y om he Swiss pa en , unde sco ing he c i ical need
o s onge in e na ional coope a ion among cen al banks.
Recapi alisa ion, in he manne ou lined ea lie , would
se e as a con idence-building measu e o acili a e such
collabo a ion.
Ano he a ionale o a liquidi y igge is ha i se es
o ensu e ha holde s o TLAC-eligible ins umen s do no
bene i om ELA p o ided o banks. Wi hou ELA du ing a
c isis scena io, c edi o s would, in u n, ace u he declin-
ing asse alues due o i e sales when banks a e no longe
ope a ional, ul ima ely lea ing hem wo se o han hey
would ha e been had ELA suppo been p o ided. Thus, i
is jus i ied ha he ma ke p ice o TLAC-eligible liabili ies
du ing a c isis should e lec public pe cep ions o he bank’s
liquidi y posi ion.
The PONV clause in he BCBS egula o y amewo k
conce ning capi al ins umen s should be amended acco d-
ingly, cla i ying ha ELA can be ega ded as a o m o
public suppo , pa icula ly when he minimum own unds
equi emen s a e no me . Cu en ly, he clause de ines a
igge e en as ‘ he ea lie o : (1) a decision ha a w i e-
o , wi hou which he i m would become non- iable, is
necessa y, as de e mined by he ele an au ho i y; and (2)
he decision o make a public sec o injec ion o capi al,
o equi alen suppo , wi hou which he i m would ha e
become non- iable, as de e mined by he ele an au ho -
i y.’153 Howe e , he clause should be amended o include a
hi d igge e en : ‘ he p o ision o Eme gency Liquidi y
Assis ance om Cen al Banks o a i m whose Common
152 Eu opean Cen al Bank’s ins uc ions o he na ional cen al
banks esponsible o ELA wi hin he amewo k o i s manda e.
Ag eemen on Eme gency Liquidi y Assis ance (27 Sep embe 2024)
pa a 4.1, s (b).
153 Basel III, pa a 49, n 9 and BCBS, ‘Basel Commi ee Issues Final
Elemen s o he Re o ms o Raise he Quali y o Regula o y Capi al’
(P ess Release 03/2011, 13 Janua y 2011).
388 U.B.Lende mann
Equi y Tie 1 capi al a io, Tie 1 capi al a io, To al Capi al
Ra io, o le e age a io, as epo ed on ei he an indi idual
(i applicable) o consolida ed (i applicable) basis, do no
comply wi h he ha monised minimum egula o y own unds
le els (namely 4.5%, 6%, 8%, and 3%, espec i ely).’
Rank, anspa ency, e en o de aul , and ax
p e e ence
The equal anking o TLAC-eligible liabili ies wi h Tie 2
ins umen s is ad oca ed o educe opaci y and agmen a-
ion o he c edi o hie a chy. Es ablishing a well-de ined
subo dina ion equi emen and ensu ing anspa ency o
TLAC-eligible liabili ies in he TLAC e m shee is c ucial.
The anspa ency ega ding he issuing s uc u e and disclo-
su e o capi al and isk, as pe Basel II, pilla 3, should be
expanded o encompass he issuing en i ies on a s andalone
basis.
Fu he mo e, he dis inc ion be ween going-conce n capi-
al (Tie 1) and gone-conce n capi al (Tie 2 and TLAC-
eligible liabili ies) could be elimina ed, as i seems a i icial
unless i can be p o ed ha G-SIBs can be esol ed in an
o de ly manne .154 Thus, igge ing TLAC-eligible liabili ies
should no be conside ed an e en o de aul and, in pa -
icula , i should no igge ea ly e mina ion igh s o any
c edi de aul swaps (CDS). The pu pose o such liabili ies
is p ecisely o mi iga e he isks associa ed wi h his e en
o he inancial sys em’s s abili y. OTC de i a i es a e o
signi ican conce n o inancial s abili y and a e only held
up o a sho ime by any empo a y s ay, as sugges ed by
he FSB Key A ibu es. Ex ending he applica ion o he
Tie 1 capi als anda ds se o h in Basel III, holding ha
nei he non-paymen no cancella ion o disc e iona y pay-
men s should cons i u e an e en o de aul ,155 o encompass
any TLAC-eligible liabili ies (including Tie 2), he eby le -
elling he dis inc ion be ween going- and gone-conce n capi-
al, is sugges ed as a mo e a ou able app oach compa ed o
imposing empo a y s ays on ea ly e mina ion igh s. Fu -
he mo e, d i ing down he s ock p ice o gene a e p o i s
om c edi de aul swaps on TLAC-eligible liabili ies no
longe p o ides incen i es.
S a u o y ools cu en ly a ailable o enable compe en
au ho i ies, such as he PONV and he bail-in, may emain
una ec ed. The ac i a ion o he ma ke -based igge , as
de ined, should esul exclusi ely in he incu ence o losses
by ins umen s quali ying o TLAC, wi hou necessa ily
compelling he ini ia ion o esolu ion p oceedings, which
ough o be conside ed sepa a ely.
While ha monising he ax ea men o deb poses a
signi ican challenge, any ax p e e ences associa ed wi h
TLAC should be o se by a educ ion in eligibili y using a
egula o y il e . This will p omo e a mo e equi able in e -
na ional egula o y en i onmen by add essing he dispa-
a e ax incen i es o e ed o hei domes ic indus ies by
indi idual coun ies. I should be ecognised ha he legal
equi emen o hold su icien TLAC alone should be su -
icien mo i a ion o compliance.
In e play be weenc edi o s andsha eholde s
In he con ex o C edi Suisse, he discou se e ol ed
a ound he in e play be ween c edi o s and sha eholde s
a he han he app op ia eness o assigning losses o AT1
ins umen s. Following he igge ing o he PONV clause
in Ma ch 2023, conce ns eme ged indica ing he need o
he comple e elimina ion o equi y sha es be o e assigning
losses o AT1 ins umen s.Like se e al o he G-SIBs, C edi
Suisse did no u ilise genuine CoCos o mee he AT1 c i e-
ia, ins ead elying on w i e-o ins umen s. These ins u-
men s di e undamen ally om CoCos. CoCos con e
in o sha es, dilu ing exis ing sha eholde s while ensu ing
ha CoCo holde s become sha eholde s wi h equal ank
pos -con e sion. By con as , w i e-o s do no con e in o
sha es, he eby lacking any po en ial upside and he c i ical
‘p inciple o hope’. Mo eo e , gi en ha hese ins umen s
a e comple ely w i en o while he bank e ains a CET1
a io o 5.125 pe cen o RWA, hey a e, in e ec , sub-
o dina e o equi y sha es.156 This hie a chy pe sis s unless
he compe en au ho i y in e enes by elimina ing ou s and-
ing sha es andmanda ing he issuance o new sha es o he
w i e-o holde s h ough a s a u o y o de ,157 he eby o e -
iding he ins umen s’ e ms and condi ions ha p eclude
such holde s om claiming hese sha es. The unde lying
mo i e o such in e en ion is o eins a e he p esumed
o de o senio i y, whe ein AT1 ins umen s should ank
senio o equi y sha es in he capi al s uc u e.158
154 C Edoa do D. Ma ino, Casimi o An onio Nig o, and Tom Vos,
in ‘CoCos in Eu ope: Wha Is W ong – and How o Fix I ?’ (29
Ap il 2024) Eu opean Banking Ins i u e Wo king Pape Se ies 169,
Ams e dam Law School Resea ch Pape 18/2024, Ams e dam Cen e
o Law & Economics Wo king Pape 09/2024 < h ps:// ss n. com/
abs ac = 48107 61 > .
155 Basel III, pa a 53.6 and pa a 55.7, s (b).
156 See U s Lende mann and o he s, Banking Union Essen ial Te ms:
A S udy Reques ed by he ECON Commi ee (Eu opean Pa liamen
July 2018) IP/A/ECON/2016–07 PE 619.028, 58 < h ps:// www. eu op
a l. eu opa. eu/ RegDa a/ e udes/ STUD/ 2018/ 619028/ IPOL_ STU(2018)
619028_ EN. pd > .
157 Bank Reco e y and Resolu ion Di ec i e (EU) 2017/2399, [2017]
OJ L345/96, a 60.
158 See Eu opean Cen al Bank Banking Supe ision, Single Reso-
lu ion Boa d and EBA, ‘Banking Supe ision, SRB and EBA S a e-
men on he Announcemen on 19 Ma ch 2023 by Swiss Au ho i ies’
(Join P ess Release, 20 Ma ch 2023) < h ps:// www. banki ngsup e is
ion. eu opa. eu/ p ess/ p / da e/ 2023/ h ml/ ssm. p 230 320~9 0ae 34dc5. en.
h ml > .
389Au oma ed bail-in: elimina ing egula o y es ain s
The banks’ p e e ence o w i e-o s o e CoCos can be
a ibu ed o hei sha eholde esis ance agains dilu ion
caused by CoCo con e sions in o new sha es, s i ing o
a oid any e osion o con ol, while he Boa d is cau ious
abou he complexi ies associa ed wi h con ingen capi al
h ough sha eholde esolu ions.159 The eliance on w i e-
o s highligh s he ela i e weakness in c edi o go e nance,
a de iciency ha became e iden e en in C edi Suisse’s
in e ac ions wi h p o essional in es o s.
F om a egula o y pe spec i e, he cen al conce n lies
in he e icacy o going-conce n loss abso p ion o TLAC-
eligible ins umen s, as Ma ino, Nig o, and Vos ha e high-
ligh ed ega ding CoCos,160 while lexibili y in he con ac-
ual a angemen s be ween banks and in es o s gene ally
aligns wi h a philosophy a ou ing es ained egula ion.
Howe e , in he C edi Suisse case, he US SEC deemed
s a u o y con e sions o AT1 ins umen s in o CET1 ins u-
men s as public o e ings, equi ing addi ional disclosu es
and app o als.
Impo an ly, howe e , he con ac ual and ma ke -based
mechanism p oposed in his s udy does no in ol e he pe -
emp o y exp op ia ion o sha es be o e igge ing TLAC-
eligible ins umen s. No does i include any s a u o y
deb - o-equi y swap ha migh be equi ed o ensu e equi y
sha es emain a ailable o owne ship and go e nance i
TLAC-eligible liabili ies consis solely o w i e-o s. Bo h
ac ions—exp op ia ion and deb - o-equi y swaps—would
necessi a e o icial in e en ion by public au ho i ies, which
is no con empla ed in he p oposal o his s udy. Ensu -
ing a leas equal ea men o TLAC-eligible liabili ies and
CET1 ins umen s in he e en o a igge can hus only be
achie ed by op ing o a CoCo design a he han a w i e-o
app oach.
The CoCo design o e s dis inc ad an ages o e w i e-
o s. While his s udy inds no no ma i e p inciple p ohibi -
ing he subo dina ion o TLAC-eligible liabili ies o CET1
ins umen s, CoCos p o ide educed li iga ion isk due o
hei highe pe cei ed ai ness in he anking s uc u e, lowe
losses, and po en ial upside oppo uni ies o in es o s.
Addi ionally, CoCos enhance ma ke discipline by engag-
ing sha eholde s du ing issuance and enabling go e nance
changes upon igge ing, as new sha eholde s en e ing he
owne ship s uc u e a e likely o ad oca e o es uc u -
ing measu es wi h g ea e de e mina ion. Impo an ly, he
complexi y o en associa ed wi h con e ing liabili ies in o
equi y h ough s a u o y deb - o-equi y swaps is mi iga ed
by he p oposed con ac ual igge ing mechanism, which
in ol es no g ea e complexi y han ha o o dina y man-
da o y con e ibles. Fo hese easons, he e is a compel-
ling case o manda ing he inco po a ion o CoCo designs
in o TLAC amewo ks a he han elying on w i e-o
mechanisms.
Res ic ions onasse encumb ance
Colla e alised loans and co e ed bonds p o ide banks
wi h a cos -e ec i e sou ce o unding and se e as sa e
asse s o in es o s. Howe e , highe le els o asse encum-
b ance asymme ically ans e isks o unsecu ed c edi o s,
inc ease he cos o unsecu ed unding, and heigh en banks’
ulne abili y du ing c ises.161 The in oduc ion o he bail-in
ool and TLAC equi emen s—as an icipa ed o e a decade
ago by he FSB TLAC wo king g oup and highligh ed in he
li e a u e162—has incen i ised banks o adjus hei unding
s a egies owa ds cheape co e ed bonds. This end in ensi-
ies du ing p e-c isis pe iods, as banks inc easingly ely on
pledgeable asse s o secu e unding, a pa e n obse ed in
p e ious c ises.163
Mo eo e , his shi educes he a ailabili y o unencum-
be ed asse s ha cen al banks ely on as colla e al o man-
age he isks associa ed wi h ELA p o isioning.164 Howe e ,
159 See Deu sche Bundesbank, ‘Con ingen Con e ible Bonds:
Design, Regula ion, Use ulness’ (2018) 70 Mon hly Repo 60; S e-
an A djie and o he s, ‘CoCo Issuance and Bank F agili y’ (2017)
BIS Wo king Pape 678.
160 Edoa do D. Ma ino, Casimi o An onio Nig o, and Tom Vos,
in ‘CoCos in Eu ope: Wha Is W ong – and How o Fix I ?’ (29
Ap il 2024) Eu opean Banking Ins i u e Wo king Pape Se ies 169,
Ams e dam Law School Resea ch Pape 18/2024, Ams e dam Cen e
o Law & Economics Wo king Pape 09/2024 < h ps:// ss n. com/
abs ac = 48107 61 > .
161 Pie e Be honnaud and o he s, ‘Asse Encumb ance in Eu o
A ea Banks: Analysing T ends, D i e s and P edic ion P ope ies
o Indi idual Bank C ises’ (Augus 2021) ECB Occasional Pape
261/2021 < h ps:// ss n. com/ abs ac = 39152 74 > ; Albe Banal-
Es anol and o he s, ‘Asse Encumb ance and Bank Risk: Theo y
and Fi s E idence om Public Disclosu es in Eu ope’ (25 Augus
2021) Banco de Espana Wo king Pape 2131 < h ps:// ss n. com/ abs
ac = 39112 25 > ; Toni Ahne and o he s, ‘Asse Encumb ance, Bank
Funding and Financial F agili y’ (2016) Bundesbank Discussion
Pape 17/2016 < h ps:// ss n. com/ abs ac = 27985 35 > .
162 Pe e N Posch, Johannes Luebbe s and Joachim E ha d , ‘Bail-
In and Asse Encumb ance: Implica ions o Banks’ Asse Liabil-
i y Managemen ’ (2017) 18 Jou nal o Banking Regula ion 149–
62 < h ps:// doi. o g/ 10. 1057/ jb . 2016.4 > .
163 Jo ge An onio Chan-Lau, and Hi oko Ou a, ‘Bail-In Powe ,
Deposi o P e e ence, and Asse Encumb ance: The End o Cheap
Senio Unsecu ed Deb ? A S uc u al P icing Pe spec i e’ (1 Ma ch
2016) < h ps:// ss n. com/ abs ac = 27859 92 > ; Hi oko Ou a and o h-
e s, ‘Changes in Bank Funding Pa e ns and Financial S abili y Risks’
IMF Global Financial S abili y Repo (IMF Oc obe 2013) < h ps://
ss n. com/ abs ac = 23383 07 > .
164 See o example, Eu opean Cen al Bank’s ins uc ions o he
na ional cen al banks esponsible o ELA wi hin he amewo k o
i s manda e. Ag eemen on Eme gency Liquidi y Assis ance (27 Sep-
embe 2024) pa a 8.1.

390 U.B.Lende mann
he inc eased demand o colla e al du ing c ises aises c i i-
cal ques ions abou how limi ed unencumbe ed asse s should
be alloca ed—balancing he need o main ain ma ke acces-
sibili y and a oid exo bi an e inancing cos s agains he
need o ensu e adequa e liquidi y p o ision.
Du ing he GFC, cen al banks we e compelled o loosen
hei lending policies o add ess hese challenges,165 a end
epea ed du ing he banking u moil in sp ing 2023. Fo
example, unde he Bank Te m Funding P og am in oduced
by he Fede al Rese e on 12 Ma ch 2023, ce ain secu i-
ies we e accep ed as colla e al a 100 pe cen o pa alue,
dis ega ding hei po en ially lowe ue and ai alue.166 A
he same ime, C edi Suisse lacked enough unencumbe ed
asse s o mee he colla e al equi emen s o sound ELA
p o isioning. As a esul , an ‘addi ional eme gency liquidi y
assis ance’, o ‘ELA+’, o up o 100 billion CHF hus had o
be g an ed based on a newly in oduced eme gency law,167
wi hou any s a e gua an ee o colla e al.
To coun e ac he end o inc easing asse encumb ance
du ing c ises and ensu e he p e equisi es o ELA p o i-
sioning, his s udy p oposes in oducing a limi on he pledg-
ing o banks’ asse s. This app oach, p e iously ad oca ed by
IMF s a and academics,168 would ans o m exis ing EU
epo ing obliga ions169 in o a conc e e egula o y equi e-
men , ex ending beyond he high-quali y liquid asse bu e s
cu en ly manda ed by he liquidi y co e age a io (LCR).
No ably, as LCR bu e s a e designed o be u ilised du ing
pe iods o s ess o co e ne liquidi y ou lows, i is c i ical
ha he equi ed s ock o unencumbe ed asse s emain a ail-
able o suppo cen al bank in e en ions a his junc u e.
The exac equi emen o unencumbe ed asse s should a
leas co e he expec ed cash ou lows unde s ess condi-
ions o he du a ion o a es uc u ing pe iod.
Conclusion
In he a e ma h o he GFC, amid asymme ic in o ma ion,
and a ying poli ical in luence and egula o y powe s, he
condi ions d i ing bank egula ion eached an equilib ium.
G-SIBs and egula o s success ully na iga ed hei sha ed
ask o add essing he TBTF issue a hand—p esen ing a
c edible solu ion o he public. Subsequen ly, he newly
in oduced bail-in became a euphemis ic an onym o a
public bailou o ailing banks. The b oad scope o assess-
men and eno mous disc e ion o m a ga eway o he ime
inconsis ency o esponsible poli icians who ind hemsel es
apped in his s a e, he eby ende ing a bail-in concep ually
compa ible wi h a bailou —an obse a ion ha e idences
he p esence o cogni i e dissonance.
I has been shown ha TLAC, he complemen a y e m,
has led o he issuance o opaque bail-in bonds, ma ke ed
as loss-abso bing capaci y in a bank esolu ion o bo h
home and hos egula o s, while being p esen ed o in es-
o s and ax au ho i ies as deb ins umen s. These bonds
can e ain unding cos ad an ages o e egula o y capi al,
e en i he implici s a e gua an ee we e cu ailed. Hype -
bolically, i can be a gued ha he cu en bail-in concep
e ec i ely se es i s in ended objec i es as long as i s ac i-
a ion emains unnecessa y.
D awing upon hese indings, his s udy acknowledges
he endu ing na u e o he TBTF dilemma and highligh s
ha he exis ing egula o y p ocesses do no su icien ly
add ess o alle ia e i . In esponse o his challenge, his
s udy ad oca es o educing he au ho i ies’ disc e ion
when ac i a ing he addi ional loss-abso bing mechanism
o TLAC. This can be achie ed by implemen ing a man-
da o y, ma ke -based igge design, inspi ed by he con-
ac ual app oach ad oca ed by he Swiss Commission o
Expe s in i s 2010 Final Repo .
The p ima y conce n su ounding bank ailu es lies
in he e osion o ma ke con idence, which is e ealed
h ough declining s ock p ices and liquidi y sho ages.
This s udy ecommends inco po a ing a sha e p ice igge
linked o p ede e mined s ock ma ke h esholds ha align
wi h hese indica o s and es ablishing a liquidi y igge
as a condi ion o ELA p o ision by cen al banks. Fu -
he mo e, equal anking should be es ablished o Tie 2
ins umen s and TLAC-eligible liabili ies (o he han Tie
1 ins umen s) o enhance cla i y and educe complexi y
associa ed wi h he agmen ed c edi o hie a chy. I is
sugges ed ha he TLAC e ms be amended acco dingly,
explici ly speci ying ha he occu ence o a igge ing
165 F ancois Koulische and Daan S uy en, ‘Cen al Bank Liquidi y
P o ision and Colla e al Quali y (1 Sep embe 2014) 49 Jou nal o
Banking and Finance < h ps:// ss n. com/ abs ac = 22136 90 > .
166 Boa d o Go e no s, P ess Release and Te m Shee on he
Bank Te m Funding P og am (Fede al Rese e Sys em, 12 Ma ch
2023) < h ps:// www. ede al es e e. go / newse en s/ p ess elea ses/
mone a y20 23031 2a. h m > .
167 O dinance on Addi ional Liquidi y Assis ance Loans and he
G an ing o Fede al De aul Gua an ees o Liquidi y Assis ance
Loans om he Swiss Na ional Bank o Sys emically Impo an
Banks o 16 Ma ch 2023, as amended by O dinance on Addi ional
Liquidi y Assis ance Loans and he G an ing o Fede al De aul
Gua an ees o Liquidi y Assis ance Loans om he Swiss Na ional
Bank o Sys emically Impo an Banks Amendmen o 19 Ma ch
2023, bo h o which a e based on he Swiss Fede al Cons i u ion, a
184, pa a 3 (‘sa egua ding he in e es s o he coun y’), and a 185,
pa a 3 (‘coun e exis ing o imminen h ea s o se ious dis up ion o
public o de o in e nal o ex e nal secu i y’).
168 Hi oko Ou a and o he s, ‘Changes in Bank Funding Pa e ns and
Financial S abili y Risks’ IMF Global Financial S abili y Repo
(IMF Oc obe 2013) < h ps:// ss n. com/ abs ac = 23383 07 > .
169 See Regula ion (EU) 575/2013, a 443; EBA/GL/2014/03
(27 June 2014); Eu opean Sys emic Risk Boa d Recommenda ion
ESRB/2012/2 (20 Decembe 2012) OJ C 119, 25.4.2013, 1 on he
unding o c edi ins i u ions.
391Au oma ed bail-in: elimina ing egula o y es ain s
e en should no be cons ued as a de aul e en . In oduc-
ing his p o ision would emo e he a i icial dis inc ion
be ween going- and gone-conce n capi al, which p o es
ine ec i e o banks ha canno be esol ed in an o de ly
manne . This app oach ensu es ha TLAC e ec i ely con-
ibu es o inancing esolu ion, while p o iding cen al
banks wi h he necessa y con idence o o e ELA. Ul i-
ma ely, hese measu es aim o es o e ma ke discipline
and sa egua d he s abili y o he inancial sys em.
Acknowledgemen s The au ho hanks Co inne Zellwege -Gu -
knech , Wol -Geo g Ringe and Hein ich Nemeczek o hei alu-
able eedback. This esea ch bene i ed om discussions a he 6 h
Con e ence on Law and Mac oeconomics a Tulane Law School (2–3
No embe 2023) and he Sydney Banking and Financial S abili y
Con e ence (8–9 Decembe 2023). Special hanks a e ex ended
oAnna Gelpe n, Edua do Ma ino, Geo die Reid, Albe Choi, Je -
e y Zhang, Richa d Senne , and o he pa icipan so hese e en s o
hei hough ul commen s and sugges ions. Finalised on 31 Decem-
be 2024, his pape e lec s in o ma ion a ailable as o ha da e.
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U s B. Lende mann is a P o esso o Eu opean Banking and Business
Law a he Deu sche Bundesbank Uni e si y o Applied Sciences since
2014. P e iously, he se ed as a senio specialis in banking egula ion
a Swiss Financial Ma ke Supe iso y Au ho i y FINMA, wo king on
Basel III e o ms and he FSB’s Key A ibu es o E ec i e Resolu ion
Regimes. A ce i ied Ge man lawye wi h a doc o a e om he Uni-
e si y o Zü ich, his esea ch encompasses inancial s abili y, capi al
ma ke s, and banking egula ion.