Bankers have been living dangerously since the early 1980s'
debt crisis. Poor practice and inadequate regulation appear to be
behind several episodes of bad debts. Senior managers haven't
always had the right incentives. They enjoy most of the upside when
risky bets pay off, but government guarantees shield them when
gambling for redemption fails. And clumsy capital adequacy rules
from the Basel Committee haven't always protected taxpayers from
the costs. The Shadow Financial Regulatory Committee in the US
reckons that the mandatory issuance of subordinated debt by banks
could solve many of these problems.
Mitsuhiro Fukao, who heads the Japanese equivalent of the US
Shadow Committee, has dubbed subordinated debt "canary bonds" after
the canaries that coal miners used to take down mines to warn them
about methane gas.
When the birds stopped chirping and fell off their perches it was
time to get out. The US Shadow...
