European banking: Bailout, bail-in and state aid control

More than 5 years after the fall of Lehman Brothers, and at a time where the Banking Union will start with a Balance Sheet Assessment, several regulatory initiatives are trying to make bailouts harder, and push forward 'bail-in' as an alternative. This article discusses the pros and cons of these initiatives, and stresses in particular, looking at various cases of banking crises, that financial instability can be much more costly than bailouts. It therefore pleads for: (i) not ruling out prefunded bailouts as an alternative/complement to bail-in, especially to deal with negative macroeconomic shocks; (ii) making sure markets will understand that the risk of bail-in is concentrated on long-term bank liabilities. © 2014 Published by Elsevier B.V.SCOPUS: ar.j