What happened in Cyprus looks very new to people not familiar with Bail-Ins. We are more familiar with Bail-outs, government or other parties coming to the rescue of misbehaving too big to fail institution.
In the case of a bail-in, not just in banks, regulators would have the power to impose losses on bondholders while leaving untouched other creditors of similar stature, such as derivatives counterparties. By quickly addressing the problems of sickly institutions, they would also help stabilize the financial system by removing uncertainty.
David Kotok guest wrote a good article on this at Barry Ritholtz’s blog. I urge folks interested in the subject to read it.
New Zealand, which is moving away from bailout to a complete system of bail-in, is an example of a place where banking has become more dangerous. The government of New Zealand has essentially declared that insurance is too costly and cannot be accurately priced. It has stated it will resolve banking difficulties with the help of larger depositors.
In Canada there is now some discussion of the introduction and development of bail-in. Canada has a fairly clean history when it comes to bank capital and bank supervision. Is this about to change? In the Eurozone and Europe generally we have had this discussion about bail-in vs. bailout for months. Clearly, the proponents of bail-in are growing stronger in Europe, and they are going to affect the characteristics of banks and central banks and the behavior of the finance ministers who determine bank-resolution policy.
Other places in the world where regulation and supervision are strong and dependable, such as Singapore, rise in terms of desirability. Governance of financial systems is paramount. Singapore is a place where governance is very high and perpetrators of bad behavior are punished severely. Perhaps due to that standard, Singapore does not suffer the financial incidents that we see elsewhere in the world, including the US.
I wonder if it will make folks with large sum of money uneasy.
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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