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[KDI FOCUS] Bail-in to End the “Too Big To Fail” Dilemma (Sunjoo Hwang, Fellow) - YouTube
Channel: KDI 한국개발연구원
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This study first introduces the bail-in regime,
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and then, analyzes factors influencing
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the implementability of bail-ins, and finally,
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presents the institutional tools needed to
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enhance their efficiency.
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Depositors, general creditors and
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contingent convertible bond creditors
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are all subject to bail-ins.
[80]
And while the government activates the bail-in
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for deposits and general bonds,
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that for CoCo bonds is automatically
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triggered by pre-established conditions.
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In Korea, bail-ins for CoCo bond creditors
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have been in operation since 2013
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and that for depositors and general bond
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creditors will be legislated within the year.
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Of the bonds subject to bail-ins,
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only deposits exceeding the deposit protection
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limit of 50 million won are included.
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These deposits take up the largest share
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of the total financing of Korean banks
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at 27.5%.
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However, within this type of structure,
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much like in the case of Italy,
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the government will most likely
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choose a bail out, even if bail-ins are avaliable,
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due to the heavy political burden
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posed by the vast number of individuals,
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small business operators and SMEs.
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So, what are the factors affecting
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the implementability of bail-ins?
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Theoretically,
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when the market anticipates a bailout,
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there is an increase in the number of investors.
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This, in turn, increases the political burden
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for the government,
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who will then, choose to bail out.
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In contrast, if the market anticipates a bail-in,
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the number of investors declines,
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which will reduce the political burden
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for the government,
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and a bail-in will be implemented.
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This means, market expectations over
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the means of loss-sharing
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and the resulting political burden are
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the main factors that influence implementability.
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To examine what the actual market
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expectations are over the implementability
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of a bail-in, an analysis was conducted
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using CoCo bonds.
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A comparative analysis on the interest rates
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of CoCo bond issuing countries reveals that,
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the higher the share of discretionary,
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that is, government triggered, CoCo bonds,
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the lower the interest rates.
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The results imply that the market assumes
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there is little possibility of
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a government-activated bail-in
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in a time of crisis due to the political burden.
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Therefore, more will invest,
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despite the low interest rates.
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To put it another way,
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this means that investors do not believe that
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CoCo bonds will function as designed,
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and expect a bail-out
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in a crisis.
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