Will bail-in work in a crisis? - Comment & Profiles -

A great deal of faith has been placed in bail-in bonds but so far there is little evidence of how they might operate in a crisis.

Banks have been busy raising bail-in capital but they have a long way to go. One estimate is that EU banks need to raise €450bn of loss-absorbing capital under the new rules. But bail-in debt is expensive and so has an impact on profitability.

It is very relevant to ask, therefore, if bail-in will be effective in resolving a troubled bank or banks without the need for taxpayer support – the rationale behind its creation following the financial crisis. Bailing-in one bank in difficulties is practically possible but if the entire system is under pressure it may be very hard for the regulatory authorities to stand back. By then the politicians will be involved and a different type of assessment could be made.

Then again things will vary across jurisdictions because, as S&P Global Ratings points out in a paper called Ending Too Big to Fail; whereas the US has moved a fair distance to prevent future bail-outs, by contrast, policy-makers in Asia-Pacific "where bail-outs do not carry the same political baggage" have been less assertive. 

For as long as this remains the case, Asian banks will have a funding advantage and, with their  margins less squeezed by quantitative easing, profits will be more robust for the foreseeable future.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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