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.”