The Future of Bail-in for Banks: Resolving the Credit Suisse Dilemma

Abstract

The collapse of Credit Suisse highlights the limitations of bail-in mechanisms in preventing bailout. This paper explores what we term the “Credit Suisse Dilemma”—a situation where bail-in bonds, designed to reduce government intervention during a banking crisis, can inadvertently increase the scale of such intervention if banks are bailed out without activating these bonds. We present a simple model illustrating this problem and discuss potential solutions.