The Bail - in Puzzle Editorial

Bail-in has become the favorite focal point, or rather the favorite provocative term in the policy debate about bank rescue programs in Europe. For instance, over the past few weeks, the German government has insistently requested a substantial participation of the private sector in any further debt restructuring. Others, like the President of the European Central Bank have vigorously opposed any step towards a true bail-in. Likewise, most European governments and some prominent economists have warned of the devastating consequences a spreading of default expectations would have on the financial stability of the European banking system. Such warnings are not without reason. The gradual acceleration of the crisis over the past three years has left many financial institutions holding considerable amounts of once-high quality debt that has turned sour over time. The existing accounting system, however, has trapped these assets in the banks’ balance sheets. Selling downgraded debt is tantamount to realizing the accumulated losses – many banks can simply not afford to take the hit, given their rather meagre equity cushions. The Bail-in Puzzle Editorial