Junior debt holders should incur a loss on their holdings when a bank gets into trouble, an international bank lobby group said.
In a report supporting banks creating ‘living wills’ to limit damage to financial industry when firms collapse, the Institute of International Finance (IIF) signalled it was bowing to what regulators say is inevitable.
The Financial Stability Board (FSB) of global regulators is finalising ‘bail in’ plans so that bondholders as well as shareholders bear the cost of rescuing banks in the next crisis and not the taxpayer.
The key issue is how far to go, for example, whether hitherto ringfenced senior bondholders should also be in the firing line.
The IIF said calling on senior bondholders to take a hit -- as was briefly suggested in Ireland to tackle its troubled banks -- should be the ‘last resort alternative to winding down the firm’.
The European Union's executive European Commission is finalising plans for a pan-EU banking crisis resolution framework and the bloc's financial services chief Michel Barnier has already said bondholders must be prepared to take a hit.
The IIF report seeks to shape how European and other regulators will allow banks to be rescued or wound down.
The banking lobby group said regulators should not interfere too much in the structure of firms.
Britain has been leaning towards forcing banks to effectively turn their retail arms into subsidiaries to protect depositors. It has also been putting pressure on British-based branches of foreign banks to top up on liquidity levels.
Regulators want to be able to wind down any bank quickly without destabilising the financial markets and avoid the meltdown seen when US bank Lehman Brothers collapsed in September 2008.
The IIF said banks have a responsibility to provide information about critical functions to supervisors to allow the functions to continue to operate in the event of a crisis.
‘It is important that the failure of such a firm does not, through its interconnectedness with the broader system, give rise to a systemic event that undermines financial stability,’ The IIF report said.
Banks should create a single resolution plan for the whole group, which should address how to resolve different parts of the group and be developed assuming international cooperation.
