Bank bail-ins struggle to find the right balance
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Bank bail-ins struggle to find the right balance

As the G20 seeks to install a permanent resolution mechanism to enable burden sharing between the private and public sectors in any future financial crisis, investors and banks are in a state of flux. Pricing bank debt securities that convert into equity in times of stress is problematic, if they are investable at all. Hamish Risk reports.

BY MID-2011 the Basle Committee for Banking Supervision in coordination with the Financial Stability Board is expected to complete a study that will determine how much, and in what form, bank capital will be required to act as a shock absorber for the so-called "global systemically important financial institutions (G-Sifis)." Running parallel to this, the FSB will also examine the viability of contractual and statutory bail-ins, before the two groups make their final recommendations by the end of 2011.

For fixed-income investors, the implications are huge. In a future crisis don’t expect to be repaid in full. Political pronouncements are unequivocal. "We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking risk," the German Chancellor, Angela Merkel said at the G20 meeting in Seoul last month. Bank capital regulators will probably come up with a menu of options that will home in on fixed-income investors. They might include straightforward capital surcharges, bail-in instruments and contingent capital.

How much more will banks pay?

Based on single A rated issuer

Source: JPMorgan

"The cost was already being borne by the equity holders through dilution or nationalisation, the only place it can go is really fixed income or hybrid investors," says Vinod Vasan, head of FIG debt capital markets at Deutsche Bank in London.

Gift this article