In or out?

20 September 2010 By Richard Beales Follow @richardbeales1

The idea of rescuing banks with creditorenabled restructurings has been overshadowed by a slew of other plans and some resistance. Regulators are now giving bailins, which avoid bailouts, more attention. The practicalities would be fraught, but the concept ticks many boxes.

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Mario Draghi, chairman of the Financial Stability Board and governor of the Bank of Italy, wrote on Sept. 16 that "Addressing the problem of 'too big to fail' is ... the next central step in the reform programme" in an article published by the Financial Times.

Among other things, Draghi said systemically important institutions must increase their cushions against losses. "This lossabsorbing capacity could include a combination of equity capital surcharges, contingent convertible capital and mechanisms to 'bail in' creditors."

"Statutory powers enabling the resolution authority to bail in senior debt holders would expand the options for going concern resolution," Draghi said.

The bailin idea, of which Credit Suisse executives were early advocates, would impose on a failing bank an accelerated version of a corporatestyle restructuring an option generally not available to banks at present.

According to the Association for Financial Markets in Europe, a bailin "would recapitalize the firm as a going concern by converting a sufficient amount of debt to equity without using any government capital injections. Execution would be fasttracked [e.g. over a weekend]; given the time pressures, results would be imposed ... via a clear and fair protocol ... The legal claims of creditors would be reduced in exchange for overall value maximization similar to a corporate restructuring."

The Basel Committee also referred to bailins in its Sept. 12 release announcing new, higher global bank capital standards: "The Basel Committee and the FSB are developing a well integrated approach to systemically important financial institutions which could include combinations of capital surcharges, contingent capital and bailin debt."

Draghi article in FT (subscription)

AFME paper released on Aug. 12

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"Statutory powers enabling the resolution authority to bail in senior debt holders would expand the options for going concern resolution," Draghi said.

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