Bail-in is key to ensuring burden sharing and addressing moral hazard in bank resolutions. However, bail-in implementation – the bail-in mechanics – may pose significant economic and operational challenges. This paper1 aims to assess the relevance of discretionary exclusions – i.e. decisions by resolution authorities, at the time of resolution, to exclude from bail-in some liabilities that are legally bail-inable – for the credibility of the EU bail-in design, both in resolution planning and execution. It presents discretionary exclusions as a legal flexibility to minimise operational and economic risks of bail-in execution.

The first part shows that discretionary exclusions in the EU are a consequence of the legal nature of the EU open bank bail-in and the prevalence of the OpCo structure in its banking landscape – in contrast to the US economic “closed-bank bail-in” for HoldCos of G-SIBs. We highlight that discretionary exclusions, as resolution authorities’ prerogative, serve to ensure the credibility of bail-in execution, either as part of an open bank bail-in strategy or as a source of financing for transfer strategies.

The second part focuses on the operational and economic challenges to the bail-in of three types of liabilities – derivatives, structured notes and non-covered deposits – to illustrate the potential need for discretionary exclusions. This technical analysis is based on a survey of the six largest French banking groups, following a workshop with the industry in March 2023.

In the third part, we assess the overall capacity of resolution authorities to make discretionary exclusions. We highlight the resolution authorities’ trade-off between, on the one hand, excluding liabilities to ensure a smooth bail-in execution, and, on the other hand, the need to mitigate the risks of a lack of resolution funding and NCWO breach. We argue that the quality of the bail-inable capacity is more important than its quantity, underlining the need to focus efforts on fully operationalising the bail-in of subordinated debts and senior vanilla liabilities of banks with an ample bail-inable capacity.

Accordingly, we put forward a proportionate and pragmatic approach to determine the relevant bail-in operational scope in resolution planning.