The Banking Union and evidence on bail‐ins and bailouts

Abstract

AbstractThis article analyzes the euro area's banking sector regulatory framework, known as the Banking Union. It shows how distressed banks' noncompliance with supervisory, state aid, or central bank lending policies can trigger the application of resolution or liquidation measures. Further, it provides new evidence on large banks distress episodes in the European Union and the United States, suggesting that recapitalization is a more cost‐effective policy instrument than resolution or liquidation. Finally, it argues that the Banking Union lacks an appropriate recapitalization instrument for borderline distressed banks and that a more nuanced and structured stance on regulatory forbearance is probably warranted.