“Bail-in” regimes, where creditors are forced to take losses when banks are rescued, would help make giant institutions safer, but they could also spread contagion in a financial crisis, a paper by International Monetary Fund staff members has warned.
To prevent the collapse of one bank from destabilising the broader financial system, the IMF staff note argues that regulators may want to limit the amount of unsecured bank debt other financial institutions can hold. That would effectively limit their losses if a failing bank’s debt is “bailed in” – converted to equity or partly written down as part of a broader stabilisation effort.
The IMF staff issued their comprehensive look at bail-in regimes at a time when global regulators are working on proposals to make giant “systemically important financial institutions” (Sifis) safer and reduce the risk of additional taxpayer-funded bank rescues.