Towards an optimal composition of bail-inable debtholders?

The core insight of the new EU framework for bank resolution is to allocate
losses to bank’s insiders (bail-inable creditors). This affects both financial
stability and the corporate governance of banks. The current academic
debate on bank resolution overlooks the relevance of identifying the
investors in bail-inable securities (ie who is going to bear losses) and the role
of counterparty risk. This article identifies the investors that are better suited
to hold those instruments and highlights the trade-offs between the
corporate governance role and the threat to financial stability posed by
different investors. The article demonstrates that the composition of bailinable
debtholders matters and shows – empirically and theoretically – a
transition towards a desirable composition of holders; although a
considerable room for improvement remains. This exercise deepens the
understanding of the impact of the resolution framework and the importance
of counterparties for its credibility and future applications.