April 24, 2012 / 5:00 PM / 6 years ago

IMF backs bank bail-in powers

LONDON, April 24 (Reuters) - Regulators should be given powers to impose losses on bondholders to avoid a bank collapsing, the International Monetary Fund said in a paper on Tuesday.

The conclusion by IMF researchers lends influential backing to the European Union’s plans to call on unsecured bondholders to “bail in” a troubled bank and avoid relying on taxpayers again.

“Bail-in power needs to be considered as an additional and complementary tool for the resolution of systemically important financial institutions,” the staff discussion paper said.

The IMF paper is aimed at shaping work at the G20 and its regulatory arm, the Financial Stability Board, on how bail-in could work in practice.

The IMF also conducts regular reviews of how member country financial systems are supervised.

The EU’s European Commission has delayed its draft law mapping out a framework for recovery and resolution of cross-border banks, fearing the inclusion of a bail-in power would unnerve jittery markets even further.

Some EU states worry it would put off investors in their domestic banks as their unsecured debt could be written down or converted into equity to shore up the lender’s capital.

The IMF paper said there should be careful thought into when the bail-in is triggered, suggesting this could happen when a bank’s mandatory capital cushion falls below the minimum level and before the lender becomes balance-sheet insolvent.

However, even with bail-in powers, the taxpayer may not be off the hook in future.

“To fund potential liquidity outflows, and given the probably temporary loss of market access, bail-in may need to be coupled with adequate official liquidity assistance,” the paper added.

Policymakers see bail-in, along with powers to close down or break up an ailing bank, as helping to end the so-called too-big-to-fail problem.

This refers to market perception that a government would always step in to help a big lender in distress, as letting it collapse would wreak havoc on the financial system as seen with the demise of U.S. bank Lehman Brothers in 2008.

The IMF paper said financial institutions may be incentivised to raise capital or restructure debt voluntarily before the triggering of the bail-in power to avert a run by short-term creditors.

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