I have a good deal of sympathy for Sheila Bair’s idea that secured creditors should take a hit when a financial institution fails. But there are two problems with her proposal. First, it would kill the triparty repo market, where lenders assume secured really means secured. Second, it is not clear to me why we should want a standardised 20 per cent haircut. Better to estimate the haircut in normal bankruptcy and apply that to any special resolution process.
Moreover, it looks to me like the most promising way of getting some effective discipline from bank creditors is to focus on the more junior categories of debt – sub-debt and potentially reverse convertibles (I like the idea of requiring banks to hold debt that converts into equity when certain thresholds are breached).
The Bank of England is likely to be dull tomorrow, writes Chris Giles of the Financial Times. No change on rates; no change in the target for quantitative easing; and no statement. But the November decision will be much harder to call, especially as it will come after the first estimate for third quarter growth and a possible pre-Budget report with the government’s new deficit projections. Read more
As Latvian devaluation looms likelier… – FT Alphaville
…Swedish finance minister prepares banks for Latvian collapse – naked capitalism Read more
There is ongoing excitement about a global tax on banks to pay for the implicit insurance they receive from the state. Many different policies shelter under this umbrella, writes Chris Giles of the Financial Times, but they have the unifying feature that if they were implemented, it would be an admission by the authorities that they will fail to regulate the banking system better in future. Read more
German resistance to IMF expansion plans is growing, writes Ralph Atkins in a blog Read more