The big talk in regulation is about forcing bondholders to take a hit when banks collapse. The concern has to be that for all the efforts of Dodd-Frank, the UK Banking Act and the EU Recovery and Resolution Directive, the outcome is unenforceable – in other words, when a major financial institution gets into trouble the fear of spreading panic will prevent governments from forcing a haircut on bondholders.
The thinking in the eurozone illustrates the point. Holders of Irish bank bonds were fully compensated so landing the government with a bail-out bill to the tune of almost 40% of gross domestic product (GDP). The prevailing view is that the needs of eurozone creditors ranked higher than those of Irish taxpayers.
