The newly agreed bank recovery and resolution directive swings Europe from one extreme a system laden with implicit government guarantees that protected bank creditors from bearing losses to the other.
The regime creates a serious time inconsistency problem by requiring private bank creditors to cover any significant losses without first cleaning up legacy debt problems. Without comprehensive efforts to restructure corporate debt, clean up banks balance sheets and fortify the European Stability Mechanism, bail-in will leave Europe much more prone to old-fashioned bank runs than in the past.