Basle Encourages Investors To Bail-In Failing Banks Ahead Of Taxpayers

Has there been a subtle shift of emphasis within the club of international bank regulators from primarily protecting depositors in failing banks to insulating taxpayers from the costs of public bailouts, or at least shoving them behind shareholders in the queue? The new restrictions on banks’ hybrid securities announced by the Basel Committee on Banking Supervision earlier this month suggests there has. They follow a broader clamping down on banks using preference shares and other forms of debt as a cut-price way to shore up their regulatory capital, all of which will be phased out under the Basel III banking-reform proposal.

Hybrid securities have characteristics of both debt and equity. They were intended to serve as an alternative source of capital to public bailouts when a financial institution got into trouble. Banks like them because they are a cheaper way to raise capital than equity; an estimated $1 trillion worth are in issue. Existing rules let failing banks count some hybrids as Tier 1 capital and so shield investors from losses that taxpayers then had to pick up through bailouts; the new rules close that loophole from the start of 2013 by requiring that hybrids trigger an automatic conversion to equity (a bail-in) or a write-off in the event of a bank becoming ‘non-viable’ and needing an injection of public capital.

Non-viability is a new regulatory concept that has fallen out of the 2008 global financial crisis and has yet to crystalize into firm meaning in national rules and regs. Plenty of arguing over its implementation to come, you can bet — and plenty of bleating by banks in developed economies that this will increase their cost of capital and so make them less able to lend. But with the need to convert existing hybrid’s into compliant securities within a couple of years (and to harvest the considerable fees that will involve), those conversations will have to be cut short. Investors in hybrids will find themselves pushed down the queue regardless.


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