Implementing bail-in properly

Jan Krahnen ()

No 35, SAFE Policy Letters from Leibniz Institute for Financial Research SAFE

Abstract: A recent proposal by the Financial Stability Board (FSB) suggests a new risk capital buffer for globally operating systemically important financial institutions. The suggested metric, "Total Loss Absorbing Capacity" (TLAC), is composed of Tier-1 capital and loss absorbing debt. In a crisis situation, "bail-in-able" debt is to be written down or converted into equity. Jan Krahnen argues that the credibility of bail-in, in the case of systemically important financial institutions, hinges crucially on the design of TLAC and the requirements that will be placed on loss absorbing "bail-in-able" debt.The fear of direct systemic consequences through bail-in could be overcome, if a holding ban were placed on the "bail-in-bonds" of financial institutions. The holding ban would stipulate that these bonds cannot be held by other institutions within the banking sector.

Keywords: total loss absorbing capacity (TLAC); too big to fail; bail-in; nachrangiges Fremdkapital (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safepl:35

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