The Ins and Outs of Bail-Ins and Bailouts; Corker-Warner Revisited

On Bail-Ins and Bailouts: BankThink's latest Discussion looked at the pros and cons of bank bail-ins, following reports that banks and regulators were considering plans to issue a certain amount of debt along with equity, specifically to shield depositors and taxpayers from losses in the event of a bank failure. Some readers thought bail-in mechanisms made sense.  "All creditors should take a hit before taxpayers," one commented. But some experts felt requiring banks to hold more equity is the only way to prevent future bailouts. "Having more equity would improve the banks' ability to perform all their useful functions, including deposit-taking and lending,"Anat Admati, Stanford professor and co-author of The Bankers' New Clothes, wrote in an earlier BankThink piece. "Requiring more equity is the simplest and most effective way to reduce the large distortions associated with the banks' high indebtedness and to prevent instability and crises." Some readers, however, didn't believe higher equity presented a perfect solution to the "too big to fail" problem either. "Raising minimum capital standards will tend to limit a bank's ability to raise capital," one reader commented.

Customer Relations:  American Banker Editor in Chief Neil Weinberg extended the debate over how banks should serve the unbanked and underbanked populations by suggesting that "the combination of technology, ingenuity and the capitalist incentive" could pave the way for the development of better products and services for the demographic.  Some readers warned such efforts would prove futile. "You advance the enchanting notion that some combination of better data and analytics, a regulatory consulting firm and capitalistic zeal will make small-dollar unsecured lending much cheaper," one reader argued. "No way. The underlying problem is that those with low income and/or poor credit also have highly variable, unpredictable financial behavior." But others thought the banking industry could come through for the underserved. "Establishing low limit and secured lines of credit with customers is a much more viable and profitable option when compared to these abusive payday loan companies," one commenter wrote on LinkedIn, where Weinberg's post originally appeared. "I believe product innovation will drive the expansion of banking services to the underbanked." Meanwhile, Jennifer Tescher, CEO of the Center for Financial Services Innovation, challenged banks to take a vested interest in the financial health of all their customers. "Too many banks still make too much money at the expense of their customers, and it is one of the biggest reasons the American public has lost faith in them" she argued.

Corker-Warner Revisited: Risk Doctor Cliff Rossi continued his critique of the newly unveiled bipartisan Corker-Warner bill by arguing that so much could go wrong with the attempt at GSE reform, should the wrong person – particularly a politician –  be put in charge of the proposed new secondary market agency. Meanwhile, Michael Kao, founder and CEO of Akanthos Capital Management, made a case for keeping Fannie Mae and Freddie Mac. "A proposed hybrid solution of dismantling the GSEs and replacing them with a Federal Mortgage Insurance Corp. (patterned after the FDIC) that would supposedly bring in 'first-loss capital' raises serious doubts," he wrote in reference to the Corker-Warner proposal. "It would shut down existing agencies only to replace them with another agency that does essentially the same thing but lacks the infrastructure built up over decades."  

Suggestions Wanted! What books should be on every banker's 2013 Summer Reading list? Email your favorites to BankThink Deputy Editor Jeanine Skowronski at Jeanine.skowronski@sourcemedia.com for inclusion in our annual slideshow.

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