Basel Committee: Bank bond investors should bear costs of bailouts

20 August 2010

Bank bond investors should be forced to bear some of the costs of a financial institution requiring a bailout, the Basel Committee on Banking Supervision has recommended.

It has proposed that debt listed as bank capital should either be written off or converted to stock should a firm face a crisis.

In a consultative paper, the committee suggested that this option should be used before taxpayers are required to put forward any kind of bailout funding, reports Bloomberg.

"A public sector injection of capital needed to avoid the failure of a bank should not protect investors in regulatory capital instruments," said the report.

Its suggestions are open for consultation until October 1st 2010.

The Basel Committee is to present a final series of reform suggestions to the G20 in Seoul this November.

It has been established to draft capital rules measures that will hopefully prevent another financial crisis and is made up of representatives from central banks and regulators in 27 countries.

John Raymond, an analyst at research firm CreditSights, said of the latest proposed measures: "It looks like the banks are going to be paying more for regulatory capital.

"They'll also have to look for a different investor base."

The committee hopes the measures will discourage excessive risk-taking as investors will no longer be buying securities with the assumption they can avoid exposure to losses if a bank fails.

Future government bailouts of companies operating in the financial sector should also be less likely under the plan, as private investors will become the first source of new equity should a crisis occur.

Earlier this week, a Barclays Capital report forecast that the 35 largest banks in the US will need to find around $115 billion in new equity or retained earnings in order to meet Basel Committee requirements on how much capital they have to maintain.

By Gary Cooper

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