Raising bank loss absorption capacity through equity capital or bail-in debt

Purpose Based upon recent statements made by the European Shadow Financial Regulatory Committee, a group of well-known professors coming from ten European countries, during the period 2012-2017, this paper aims to analyze from a European perspective the adequacy and credibility of the proposed framework. Design/methodology/approach This paper is a summary and interpretation of statements from the European Shadow Financial Regulatory Committee. Findings The authors argue that the credibility of the bail-in mechanism is likely to be limited. Because of this, unexpected losses may not be absorbed by unsecured debt holders. Therefore, there is still a need for relatively high equity capital buffers. Originality/value The issue of how to raise loss absorption capacity for banks is prominent on the international policy agenda. International regulators are aiming for a combination of equity capital, typically raised by issuing shares, retaining profits and issuing contingent convertible (CoCo) bonds and bail-in debt where unsecured creditors such as holders of subordinated and common bonds are supposed to take losses in case of a bankruptcy or restructuring of a bank.

Das European Shadow Financial Regulatory Committee: Ein Beitrag zur Regulierungskultur in Europa

The turbulence in the international financial markets in the 1980s inspired the idea that independent academics might be in a position to make a contribution to the improvement of regulation and thus ultimately also to the stability of the national financial sector in the United States. This led to the creation of the US “Shadow Financial Regulatory Committee“, a group of academics and other independent experts working in the field of financial regulation, which meets regularly and issues statements concerning conceptual as well as current issues in financial regulation. Two years ago, a similar shadow committee was founded in Europe. It is composed of members from 11 different countries. The special problems of financial regulation in Europe, as well as the special features of the European Shadow Financial Regulatory Committee (ESFRC), derive from the fact that despite the trend towards economic and political integration, Europe is still a collection of different nations with different institutional set-ups and political and economic traditions. In this paper, Harald Benink, chairman of the ESFRC, and Reinhard H. Schmidt, one of the two German members, describe the origin, the objectives and the functioning of the committee and the thrust of its recommendations.