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Implementing bail-in properly

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  • Krahnen, Jan Pieter

Abstract

A recent proposal by the Financial Stability Board (FSB) suggests a new risk capital buffer for globally operating systemically important financial institutions. The suggested metric, "Total Loss Absorbing Capacity" (TLAC), is composed of Tier-1 capital and loss absorbing debt. In a crisis situation, "bail-in-able" debt is to be written down or converted into equity. Jan Krahnen argues that the credibility of bail-in, in the case of systemically important financial institutions, hinges crucially on the design of TLAC and the requirements that will be placed on loss absorbing "bail-in-able" debt.The fear of direct systemic consequences through bail-in could be overcome, if a holding ban were placed on the "bail-in-bonds" of financial institutions. The holding ban would stipulate that these bonds cannot be held by other institutions within the banking sector.

Suggested Citation

  • Krahnen, Jan Pieter, 2014. "Implementing bail-in properly," SAFE Policy Letters 35, Leibniz Institute for Financial Research SAFE.
  • Handle: RePEc:zbw:safepl:35
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