Chairman of the Australian Prudential Regulatory Authority (APRA), Wayne Byres, is contemplating the adoption of ‘bail-in’ bonds to reduce the risks of Australian taxpayers being called upon to bail-out of the banking system in the future. From The AFR:
…the adoption of bail-in bonds or Total Loss Absorbing Capital (TLAC)… aims to ensure taxpayers are never called on to save a bank by writing terms into bonds that effectively force them to take losses in certain conditions.
…there is a benefit of forcing TLAC on the banks, as Byres pointed out. It will go some way to limiting the exposure of taxpayers to the banks, but also reduce the funding uplift the big banks have received over their smaller competitors by virtue of their too-big-to fail status.
Under a bail-in, recapitalisation of the banking system would become internal. That is, holders of subordinated debt (holders of lower-ranking, unsecured bonds) would be forced to convert some of their bonds to equity, thereby resulting in bondholders accepting a greater level of risk.
For mine, such a bail-in would be a positive move. For too long, bank bondholders have been earning excessive returns by essentially holding government bonds, since the banking system is effectively government guaranteed. In turn, the cost of capital for the banks has been artificially lowered creating an environment of cheap funding and excessive credit creation.
As noted by Sarantis Tsiaplias, Senior Research Fellow at the Melbourne Institute of Applied Economic and Social Research, bail-ins should, in theory:
…result in a shift in risk – and its associated costs – away from taxpayers and towards bank debtors and creditors. The accompanying repricing of bank bonds should encourage investors to better evaluate the lending practices of banks. Bondholders will require a greater return for lending to riskier banks, thereby increasing the cost of capital for those banks, and yielding a return for investors more commensurate with the true risks in the banking sector.
Sounds like a better system to me.
