Following the financial crisis 2008-2010, the European banking regulation was redesigned with the aim of terminating Too-Big-To-Fail (TBTF) for large financial institutions. The new Bank Recovery and Resolution Directive (BRRD) regime focuses on bail-in and resolution as precautionary and crisis management tools. Market discipline is supposed to come in large parts from the pricing of bail-inable debt which has to be built up fully by 2024. In this report, it is analysed whether a potential bail-in is endangered by vulnerable parties whose presence among bail-inable debt holders may force governments to bail them out. Two such vulnerable groups stand out: retail investors who are subject to government protection for political reasons, and fellow banks which tend to be bailed out for systemic risk reasons. Thus, for bail-in to be effective, neither retail investors nor fellow banks should hold significant fractions of any bank’s bail-inable debt.
To ensure the credibility of market discipline induced by bail-in, neither retail investors nor peer banks should appear prominently among the investor base of banks’ loss absorbing capital. Empirical evidence on bank-level data provided by the German Federal Financial Supervisory Authority raises a few red flags. The list of policy recommendations at the end of this paper encompasses disclosure policy, data sharing among supervisors, information transparency on holdings of bail-inable debt for all stakeholders, threshold values, and a well-defined upper limit for any bail-in activity.