Technology & Finance
Haircuts for Creditors as a Solution to Too Big to Fail?
Gillian Tett in the FT recently wrote about a concept she describes as a “bail-in”, rather than a “bail-out” for systemically important banks.
“This idea, mooted by Credit Suisse in an essay this year, argues that in essence the best way to handle a crisis at a large, systemically important bank is to force creditors – not taxpayers – to swallow losses if disaster strikes; and, more importantly, to do this while the bank is still operating as a going concern, so it does not collapse – and cause Lehman-style havoc.”
Unlike contingency capital, or cocos, this would not occur when certain triggers are reached but would be undertaken by regulators.
That would thus prevent banks from trying to game complex triggers, and investors from endlessly speculating about when triggers might be activated.
The U.S. financial reform should be seen as a first step. Now that some of the big items are agreed, it is time to look at some of the big issues that were sidestepped, such as Too Big To Fail.