Bank Governance and the Bail-in in the EU. A Law & Finance analysis on the role of bail-inable creditors

This dissertation assesses the impact of the EU Directive on Bank Recovery and Resolution (BRRD) on bank corporate governance and investigates a fundamental question. Can the resolution framework for distressed banks enhance the quality of banks’ decision making? According to the Directive, the Resolution Authority can impose losses on bank’s creditors in case of distress through a bail-in. Bail-inable creditors become residual claimants of the bank, contingent on its distress. The first part of the dissertation establishes an analytical framework for bank governance, starting from the problem of what can be defined as “good governance” in banking. The dissertation hypothesizes that governance regulation represents a necessary link between the incentives of corporate constituencies and the goals of substantive regulation. The second part builds upon this analytical framework and carries out a positive analysis encompassing three channels of debt governance; namely, price internalisation of risk; contractual arrangements and the discrete impact of different type of creditors. The existence of a resolution framework should incentivise bail-inable creditors to better discipline the borrowing bank; yet, the design of both the capital and resolution regulation largely foreclose such possibility to creditors. Against this backdrop, the third part of the dissertation moves to normative considerations. The approach to this normative part combines and complements the study of cash flow rights of the management with the study of the voting rights to bail-inable creditors. On the cash flow side, the dissertation proposes to include bail-inable debt as part of the variable remuneration for bank risk-takers. On the voting right, the proposal is to grant a limited basket of ex-ante governance rights to bail-inable creditors. Such a unified approach is rather uncommon in the literature, where cash flow rights and voting rights are often approached separately whereas those complement each other in the dissertation.