Bank of England fears bail-out protection won’t be used
Bank of England officials are growing increasingly sceptical about how effective a key regulatory reform to protect taxpayers from another bail-out would be in the event of a future banking crisis.
By Philip Aldrick, Economics Editor
7:45PM GMT 19 Feb 2012
“Bail-in bonds” are being adopted by regulators across the world as a last line of defence against the collapse of banks considered too big to fail. However, officials doubt politicians would have the courage to pull the trigger on “bail-ins” in a crisis.
As currently structured, bail-in bonds would come into effect only after shareholders were wiped out. They would allow regulators to impose huge losses on holders of bank debt to put the bank’s finances back on a viable footing. In the last crisis, bondholders did not lose a penny as the taxpayer stepped in as soon as the equity was obliterated.
The idea is being adopted in the UK and has been endorsed by the Financial Stability Board, the global regulator, but officials fear future governments would rather use taxpayer funds than bail-ins.
Andy Haldane, the Bank’s executive director for financial stability, recently identified the concerns in a speech, warning: “Having debtors assume pain is fine on paper. But crisis wars are not waged on paper.”
Debt instruments which had bail-in style properties in the 2008 meltdown were not triggered, he pointed out, “because [bank management] feared scaring creditors and making a bad situation worse”.
Policy by regulators has been no different, he said, adding: “Pre-crisis, deposit and liquidity insurance were enshrined in a well-defined regime. But in the teeth of crisis, these regimes were abandoned.”
To make bondholders more accountable, the Bank has floated the idea of giving bondholders – including regular retail depositors – a vote.
In an essay in the latest edition of the London Review of Books, Mr Haldane wrote: “Voting rights could be extended across a wide group of stakeholders, but weighted by stake.”
Lawyers said it would be fairly simple to amend company law to accommodate the change for banks, as there were already provisions for debt holders to have a vote.