Raising bank loss absorption capacity through equity capital or bail-in debt

Harald A. Benink

Journal of Financial Economic Policy, 2018, vol. 10, issue 2, 275-280

Abstract: Purpose - Based upon recent statements made by the European Shadow Financial Regulatory Committee, a group of well-known professors coming from ten European countries, during the period 2012-2017, this paper aims to analyze from a European perspective the adequacy and credibility of the proposed framework. Design/methodology/approach - This paper is a summary and interpretation of statements from the European Shadow Financial Regulatory Committee. Findings - The authors argue that the credibility of the bail-in mechanism is likely to be limited. Because of this, unexpected losses may not be absorbed by unsecured debt holders. Therefore, there is still a need for relatively high equity capital buffers. Originality/value - The issue of how to raise loss absorption capacity for banks is prominent on the international policy agenda. International regulators are aiming for a combination of equity capital, typically raised by issuing shares, retaining profits and issuing contingent convertible (CoCo) bonds and bail-in debt where unsecured creditors such as holders of subordinated and common bonds are supposed to take losses in case of a bankruptcy or restructuring of a bank.

Keywords: Banks; Government policy and regulation; Capital; G28 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-01-2018-0004

DOI: 10.1108/JFEP-01-2018-0004

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