In the aftermath of the financial crisis, the European Union designed a new legislative and institutional framework to manage banking crises. This new framework is an answer to the situation where the banks could have been perceived as “too big to fail”. It aims to make a bank failure possible without any public bail-out while preserving the critical functions for the economy. To meet this objective, the legislation notably provides the European resolution authorities for a new tool which should be used in most of the resolution schemes in the future: the bail-in.
The principle of the bail-in is to use the banks liabilities to absorb the losses once the equity is exhausted and to recapitalize the banks through the conversion of liabilities into equity. However, if the principle of the bail-in is straightforward, its implementation in practice raises challenges. This is the reason why the resolution authorities will have to analyse through the resolution planning how the bail-in tool could be applied in order to anticipate as much as possible any possible hurdle to implement it in practice. In that regard the setting of a Minimum Requirement of own funds and Eligible Liabilities (MREL) to bail-in is a priority for the resolution authorities in the EU in the coming months. However, if the MREL will enhance the banks loss absorbing capacities, it is not in itself the unique answer to crisis times as it is part of the resolution planning and can require time to be properly implemented.