Higher funding costs hit even the strongest banks
Try telling investors in bank debt that the system is getting safer.
"There’s a lot of talk about debt investors who will be prepared to take losses at higher levels in the capital structure. I would be very interested to meet one"
Douglas Flint, HSBC
Investors in bank bonds are being asked to accept much higher risk of loss of principal if governments are to be taken at their word that there will be no more taxpayer bailouts. Rather than bailouts, bail-ins is the new catchphrase. Regulators and governments want banks to raise funds from debt providers that will model into their investment decisions a price for accepting potentially hefty loss given default on bank paper.
"There’s a lot of talk about debt investors who will be prepared to take losses at higher levels in the capital structure," says Douglas Flint, chief financial officer of HSBC. "I would be very interested to meet one."
He’s far from being the only cynical CFO who suspects they don’t really exist and that the much ballyhooed market in contingent capital is missing one key item: a natural buyer base.
Could the world system survive another downward spiral without government safety nets? And in its absence, what spread offers sufficient compensation to hold bank debt?
David Mathers, the new chief financial officer of Credit Suisse, says: "Given that the market is pricing in spreads of over 100 basis points on five-year CDS, I would question whether investors are really assuming that banks have implicit government support."