Abstract
This article investigates the conflict between the objectives of (1) sustaining market discipline and (2) safeguarding financial stability in the context of bank resolution. Whereas the former demands full enforcement of applicable legal rules when crisis situations occur, the latter requires a more pragmatic and flexible approach. This somewhat paradoxical situation could be explained in the context of the Legal Theory of Finance. The article argues that in order to achieve both objectives of market discipline and financial stability, it is necessary to address the tension between the two objectives when designing a bank recovery and resolution framework. It is suggested that the application of contingent convertible instruments as part of amended regulatory capital requirements and bail-in measures under newly introduced bank resolution regimes need to be applied more gradually than currently foreseen by the EU legislator.
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