Wednesday, 9 September 2015

Bailing in bonds is messy.

The Financial Times Lexicon says:

“Bail-in regimes have unnerved bondholders because they are not traditional bankruptcies, which have strict rules and a court-supervised process that mean creditors are ranked in order of repayment precedence, and those in each group must be treated equally. Bondholders and many bank executives warn that such moves could have negative consequences for the wider economy.”

So how about this for a simpler and clearer alternative.

When a bank is unable to repay bondholders on maturity of their bonds, the bank must cease granting loans. That means there will be a net inflow of money to the bank because loans will continue to be repaid while no money flows out in the form of new loans. The bank will repay bondholders as and when it can from that inflow of funds.

If it becomes clear that loans yet to be repaid will not be enough to repay bondholders in full, the bank must be wound up.

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