Keywords: Bail-in; Bail-out; Bank Resolution; Deposit Insurance; BRRD; Contagion.
A growing number of studies are focusing attention on the new bank resolution framework and, particularly, on its side effects. This paper intends to contribute to the limited literature by examining the first application of the BRRD in Italy, in 2015, to four small to medium-sized failing banks. It assesses empirically the (in)stability of bank creditors and depositors in stress situations. It analyses a unique proprietary database of the Italian Deposit Guarantee Scheme. It finds that the resolved banks incurred a significant loss of total funding since the start of their Special Administration procedure. When resolution is impending, creditors and depositors take flight dramatically. The run-off is stronger for uninsured deposits than for insured deposits. It also reveals that the deposits of some banks that are solvent but which send public signals of weakness (capital shortfall) seem to become «infected» and behave in a similar fashion. The results would seem to confirm that market discipline in fact does work. However, they also support the argument that resolution works best when the crisis is not systemic. In the presence of a systemic crisis the funding outflows can reasonably reach large proportions. They can weaken market confidence and affect other bank creditors with all the adverse knock-on effects on financial stability. If the bail-in logic can be counterproductive in those very situations for which it was conceived, it could imply that the risk of having to resort to bail-out is still very high.