In We’ll Always have Basel The Wall Street Journal reports on the work to raise capital standards to avert future bank meltdowns. One of the more interesting concepts is a “bail in”:
The idea is to set very high capital standards but allow banks to count as capital certain debt financing that automatically converts to equity when the bank’s capital ratios or stock price falls below a certain level. Creditors, not taxpayers, take the hit when a bank is struggling, and there is no discretion allowed for regulators.
The article also notes how the Dodd-Frank bill still fails to address the too-big-to-fail problem and how legislation harmful to bank profits and a tax code that punishes equity over debt damages the ability to increase their equity without curtailing loans which is desperately needed to boost this economy.
There is much change needed but the effort to increase equity is a big step in the right direction. After this last mess we as consumers may seek the safest banks in a global market.