Last Tuesday, the International Monetary Fund (IMF) released a research paper advising policymakers to consider creating bail-in rules to deal with distressed systemically important financial institutions (SIFIs).  Moody’s says the IMF’s support for cross-border bail-ins is credit negative for bondholders of SIFIs because, if implemented, a practical bail-in mechanism increases the likelihood that bondholders will receive a haircut on the debt of banks close to insolvency.

The creation of a bail-in framework will likely receive significant public support since it aims to reduce the systemic risk caused by a SIFI’s disorderly default and restore its capital without tapping taxpayer funds. Consequently, government support to an ailing bank may be limited to providing emergency liquidity to restore market confidence. The IMF’s research paper follows a European Commission (EC) proposal outlining several options to implement a viable bail-in framework. Currently, most countries lack a detailed bail-in framework for senior unsecured bondholders, although some, including the UK, Denmark and Ireland, have legislation in place that allows bailing-in certain liabilities.

For details, see IMF Support for Bail-Ins Is Credit Negative for Bondholders of Systemically Important Financial Institutions

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