Depositors' Priority Over Senior Unsecured Bondholders: A Clog in the Bank Resolution Process?

Abstract

The European Bank Recovery and Resolution Directive (BRRD) requires Members States to grant retail depositors priority over senior unsecured bondholders in the allocation of losses in bank resolution or the satisfaction of claims in the event of liquidation. This provision is contained in the Directive despite concerns raised by the banking industry that depositor priority would lead to an overprotection of depositors, increase the costs of issuing senior unsecured bonds and exacerbate a systemic crisis since senior bondholders would readily “run” at the slightest hint of trouble. This work attempts an investigation of whether the BRRD grant of priority to depositors over senior unsecured bondholders is compatible with the objectives of bank resolution contained in Article 31 (2) BRRD.