In the new regulatory environment, bank debt may be “bailed-in” or forced to take loses or be converted to equity before there is a taxpayer bail-out. This is not a new risk for banks in the post financial crisis environment, but it has not been formally included in the ratings process.
Moody’s is going to create a "loss given failure" analysis. This will have a negative impact on the debt of bigger banks. This is just a proposal, but it would make holding bank paper more risky especially if the bank is an institution that is considered financial important and subject to systemic.
So who would want to hold any of the new capital that has to be raised by banks at current prices? The price of capital should rightly increase and the size of the banking sector should shrink if the markets internalize this type of thinking. This is a good thing, but it certainly is at odds with the Fed policy of having banks lend more to improve the economy. So is there a coherent banking policy by the government?
Moody’s is going to create a "loss given failure" analysis. This will have a negative impact on the debt of bigger banks. This is just a proposal, but it would make holding bank paper more risky especially if the bank is an institution that is considered financial important and subject to systemic.
So who would want to hold any of the new capital that has to be raised by banks at current prices? The price of capital should rightly increase and the size of the banking sector should shrink if the markets internalize this type of thinking. This is a good thing, but it certainly is at odds with the Fed policy of having banks lend more to improve the economy. So is there a coherent banking policy by the government?
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