Raising bank loss absorption capacity through equity capital or bail-in debt: A perspective from Europe

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Purpose
Based upon recent statements made by the European Shadow Financial Regulatory Committee, a group of well-known professors coming from ten European countries, during the period 2012-2017, this paper aims to analyze from a European perspective the adequacy and credibility of the proposed framework.

Design/methodology/approach
This paper is a summary and interpretation of statements from the European Shadow Financial Regulatory Committee.

Findings
The authors argue that the credibility of the bail-in mechanism is likely to be limited. Because of this, unexpected losses may not be absorbed by unsecured debt holders. Therefore, there is still a need for relatively high equity capital buffers.

Originality/value
The issue of how to raise loss absorption capacity for banks is prominent on the international policy agenda. International regulators are aiming for a combination of equity capital, typically raised by issuing shares, retaining profits and issuing contingent convertible (CoCo) bonds and bail-in debt where unsecured creditors such as holders of subordinated and common bonds are supposed to take losses in case of a bankruptcy or restructuring of a bank.
Original languageEnglish
Pages (from-to)275-280
JournalJournal of Financial Economic Policy
Volume10
Issue number2
DOIs
Publication statusPublished - 2018

Fingerprint

Equity capital
Debt
Credibility
Adequacy
Bankruptcy
International policy
Convertible bonds
Profit share
Agenda
Buffer
Design methodology
European countries

Cite this

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title = "Raising bank loss absorption capacity through equity capital or bail-in debt: A perspective from Europe",
abstract = "PurposeBased upon recent statements made by the European Shadow Financial Regulatory Committee, a group of well-known professors coming from ten European countries, during the period 2012-2017, this paper aims to analyze from a European perspective the adequacy and credibility of the proposed framework.Design/methodology/approachThis paper is a summary and interpretation of statements from the European Shadow Financial Regulatory Committee.FindingsThe authors argue that the credibility of the bail-in mechanism is likely to be limited. Because of this, unexpected losses may not be absorbed by unsecured debt holders. Therefore, there is still a need for relatively high equity capital buffers.Originality/valueThe issue of how to raise loss absorption capacity for banks is prominent on the international policy agenda. International regulators are aiming for a combination of equity capital, typically raised by issuing shares, retaining profits and issuing contingent convertible (CoCo) bonds and bail-in debt where unsecured creditors such as holders of subordinated and common bonds are supposed to take losses in case of a bankruptcy or restructuring of a bank.",
author = "Harald Benink",
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language = "English",
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}

Raising bank loss absorption capacity through equity capital or bail-in debt : A perspective from Europe. / Benink, Harald.

In: Journal of Financial Economic Policy, Vol. 10, No. 2, 2018, p. 275-280.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

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AB - PurposeBased upon recent statements made by the European Shadow Financial Regulatory Committee, a group of well-known professors coming from ten European countries, during the period 2012-2017, this paper aims to analyze from a European perspective the adequacy and credibility of the proposed framework.Design/methodology/approachThis paper is a summary and interpretation of statements from the European Shadow Financial Regulatory Committee.FindingsThe authors argue that the credibility of the bail-in mechanism is likely to be limited. Because of this, unexpected losses may not be absorbed by unsecured debt holders. Therefore, there is still a need for relatively high equity capital buffers.Originality/valueThe issue of how to raise loss absorption capacity for banks is prominent on the international policy agenda. International regulators are aiming for a combination of equity capital, typically raised by issuing shares, retaining profits and issuing contingent convertible (CoCo) bonds and bail-in debt where unsecured creditors such as holders of subordinated and common bonds are supposed to take losses in case of a bankruptcy or restructuring of a bank.

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