Creditor-funded approach to resolve TBTF banks’ recapitalisation woes?
BIS’ recently proposed three-step mechanism enables a “too big to fail” bank to be recapitalised over a weekend, minus taxpayer involvement. June 06, 2013 | Lalitha SivanesanA number of financial institutions almost failed or experienced outright failure during the most recent financial crisis, resulting in the relevant governments recapitalising these “too big to fail” (TBTF) entities with taxpayer funding. Aside from the obvious direct costs on taxpayers, publicly funded bailouts can lead to increased risk-taking, reduced market discipline and create competitive distortions, further increasing the possibility of financial distress. The financial crisis and resultant collapse of some TBTF entities have resulted in increased supervision and stricter regulations, especially in terms on maintaining higher levels of capital and liquidity. Despite these measures, more TBTF entities have failed, leading authorities to enhance resolution schemes, with efforts concentrated on gaining legal authority to extend help to ailing TBTF entities without resorting to taxpayers’ funds. The Basel Committee on Banking Supervision requirements regarding the loss absorbency of capital “at the point of non-viability” and the key attributes of effective resolution schemes developed by the Financial Stability Board are some notable results of these efforts. However, resolution powers alone are insufficient, as uncertainty regarding their use may itself jeopardise financial stability. As such, the Bank for International Settlements (BIS) has drawn up an approach named a creditor-funded recapitalisation mechanism that could be deployed by the relevant authorities to determine the allocation of losses when a TBTF bank needs to be recapitalised. This three-step approach essentially entails a forced recapitalisation of a TBTF bank by its creditors when the bank reaches the point of failure. Crucially, it enables a TBTF bank to be recapitalised over a weekend without taxpayer funding in any way and to remain open for business despite a failure. Step 1...
Categories: riskregulation,Risk and Regulation, Regulation,Risk and Regulation, Keywords:TBTF, BIS, Financial Stability Board, BCBS
TBTF, BIS, Financial Stability Board, BCBS
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