FORCING creditors to take losses up front with a bail-in mechanism could help save failing banks and stop a wasteful liquidation, Bank of England deputy governor Paul Tucker said yesterday.
And bailing-in by the deposit insurer could further help protect the valuable parts of a failed bank, he told an industry conference.
A bail-in process would see a failed bank’s creditors take losses on their assets before formal bankruptcy proceedings, realising losses more quickly, allowing the healthy parts of the institution to be sold off and reducing the chance of a taxpayer bailout.
“Rather than a deposit insurer having to wait to discover its losses until the end of the process of a potentially destructive realisation of a bank’s assets, it would hear up front how much it had lost,” said Sir Mervyn King’s deputy, who hopes to take the top job at the Bank next year.
That should reduce the insurers’ losses, speed up the process and could leave it with a healthy chunk of bank to sell at a later date.