BY MID-2011 the Basle Committee for Banking Supervision in coordination with the Financial Stability Board is expected to complete a study that will determine how much, and in what form, bank capital will be required to act as a shock absorber for the so-called "global systemically important financial institutions (G-Sifis)." Running parallel to this, the FSB will also examine the viability of contractual and statutory bail-ins, before the two groups make their final recommendations by the end of 2011.
For fixed-income investors, the implications are huge. In a future crisis don’t expect to be repaid in full. Political pronouncements are unequivocal. "We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking risk," the German Chancellor, Angela Merkel said at the G20 meeting in Seoul last month. Bank capital regulators will probably come up with a menu of options that will home in on fixed-income investors. They might include straightforward capital surcharges, bail-in instruments and contingent capital.
| How much more will banks pay? |
| Based on single A rated issuer |
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| Source: JPMorgan |
"The cost was already being borne by the equity holders through dilution or nationalisation, the only place it can go is really fixed income or hybrid investors," says Vinod Vasan, head of FIG debt capital markets at Deutsche Bank in London.