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More equity would enable banks to absorb more losses without becoming distressed or needing taxpayer support. Long-term debt is a poor substitute, particularly for the largest banks.
June 24 -
Brown-Vitter is a welcome display of bipartisanship. But its proposed solution to too big to fail, equity capital, is only marginally effective in imposing discipline on management.
June 4 -
Virtually all discussions of banking crises these days assume that depositors should always be protected, often at taxpayer expense. Let's consider whether at least some depositors should be bailed in.
February 6
The era of the bank bail-in could very well be upon us.
This week, The Wall Street Journal reported that several big banks, including Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (NYSE:C), had presented to the Federal Reserve plans that involved issuing a certain amount of debt along with equity, specifically to shield depositors and taxpayers from losses in the event a bank subsidiary failed.
Per the
Banks said they each would agree to hold combined debt and equity equal to 14% of their risk-weighted assets, according to people familiar with the proposal. Long-term debt, they said, could be part of that mix. For the six biggest U.S. banks that may have to hold an additional buffer because of international guidelines, the total could be as high as 15% to 16.5%, the people said.
The plan was presented as an alternative to regulators, who have
"We do believe that concept of bail-in capital is getting greater regulatory attention and banks may have to issue more unsecured debt in the future," KBW analysts wrote in a report released Tuesday.
U.S. regulators have yet to weigh in on the specifics of the big banks' proposal. BankThink readers should expect to hear more debate on this topic.
For starters, asking creditors to take a hit would mark a significant departure for the modus operandi of the financial crisis and would, at the very least, take some getting used to.
"Banks want to pay bondholders like bondholders when times are going good but they want them to bear equity-like risk when times turn to the worse," one Journal
"If debt investors are to shoulder the risk of suffering a loss, they will need more confidence about what lurks in banks' balance sheets," write Neil Unmack and Peter Thal Larsen in a
Others argue bail-ins beat the alternative, the bailout.
"The bail-in method is much closer to what is observed in a true bankruptcy proceeding," writes
Some industry experts, including former Federal Deposit Insurance Corp. chairman William Isaac, who proposed a similar plan regarding capital requirements in a recent
But others call debt an inadequate substitute for equity. "Imposing losses or expenses from the resolution process on a bank's creditors or on surviving institutions, which themselves might be systemically important and likely to be weak at the same time, might further destabilize the economy in a crisis," Anat Admati, a professor at Stanford University and co-author of The Bankers' New Clothes, wrote in a
Should bondholders be required to bail in banks? If so, which classes of bondholders should be on the hook: Just the subordinated ones, or more senior creditors? Would bail-in mechanisms effectively curb systemic risk? Let us know in the comments below.
Jeanine Skowronski is the deputy editor of BankThink. You can contact her at
