Raising bank loss absorption capacity through equity capital or bail-in debt: A perspective from Europe

Abstract

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.

Citation

Benink, H.A. (2018), "Raising bank loss absorption capacity through equity capital or bail-in debt: A perspective from Europe", Journal of Financial Economic Policy, Vol. 10 No. 2, pp. 275-280. https://doi.org/10.1108/JFEP-01-2018-0004