Even if the existence of a bubble would be generally acknowledged - an unlikely situation in light of what I mentioned in the previous section - the policy maker’s response - if any - has to be carefully devised, especially with regard to its long run effect on the working of the financial system.
The principle of the new European rules is to absorb bank losses by bailing-in shareholders and uninsured creditors. This does not mean that bail-out is fully excluded, as the new rules contain sufficient flexibility to deal with exceptional situations where public money may be required to stabilise the banking system.