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Basel shake-up to hit bank bondholders

The Basel Committee on banking supervision have proposed plans whereby holders of bank debt may be forced to write-off their investments in the case of a government rescue of the bank.

In a consultative document released yesterday, the Basel Committee propose a so-called “bail-in” where any holders of tier 1, tier 2 or subordinated debt of the bailed out bank will either have to write-off the debt, covert it into common shares or a combination of the two.

According to CreditSights, a credit research agency, the implications are that any write-offs would be permanent, with no grounds for recourse.

The proposals would mean bondholders take the brunt of any loses, while common shareholders retain the bulk of their investments. Basel says a bond “write-off can be viewed as a transfer of wealth from the instrument holder to the common shareholders”.

CreditSights analyst John Raymond says: “On this basis, an investment in bank shares would, if these proposals are adopted, look increasingly attractive versus buying hybrids or even dated subordinated debt.”


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. This all sounds very worrying. How many ‘low risk investors’ including many with profits funds have been forced into buying ‘bonds’ are suddenly in an investment that can no longer be viewed as low risk.

    Where do financial advisers stand if they put low risk clients into fixed interest funds which then turn out to be high risk as a result of this change.

  2. Surely any new rules will apply to bonds issued after the date of the new regime, not retrospectively on bonds issued prior to that date?

  3. This is perverse. You penalise low risk investors for the benefit of high risk investors. It directly contradicts the point of both methods of investment.

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