Wednesday, May 29, 2013

How to make bank bail-ins work

In their NY Times' Dealbook column, Neil Unmack and Peter Thal Larsen conclude that the way to make bank bail-ins acceptable is to have banks provide more information so that unsecured investors can assess the risk that they are taking on.

Regular readers recognize that this is a point your humble blogger has been making since the beginning of the financial crisis.

The information that the investors need is to have each bank disclose its current global asset, liability and off-balance sheet exposure details.

It is only with this information that the investors can independently assess the risk of each bank and adjust their exposure to each bank to reflect this risk.

Regulators want banks to be able to go bust like ordinary companies. That means bondholders taking the pain if a bank fails. But if debt investors are to shoulder the risk of suffering a loss, they will need more confidence about what lurks in banks’ balance sheets.... 
A better solution would be improved transparency, as the Committee for the Global Financial System suggested recently.... 
But what to disclose? ...
All of a bank's current exposure details.
Banks will of course say disclosure can be dangerous....
Banks saying disclosure can be dangerous is ironic because up until the late 1930s, a bank disclosing its exposure details was considered the sign of a bank that could stand on its own two feet.
But unsecured bondholders will only accept the possibility of taking the pain in a bank failure if they can price their risk. 
More information is a must.
Without disclosure of each bank's current exposure details, it is simply impossible for market participants to assess the risk of each bank.

If investors are going to be responsible for taking losses, they need the information to assess each bank's risk so they can adjust their exposure to each bank to what the investor can afford to lose given the risk of each bank.

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