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SHUTTERSTOCK
New terminology regularly appears in the inancial world along
with an assumption that we will all magically understand the
new concept.
For example, the regulatory authoritiesǯ approach towards inancial
institutions and Ǯtoo big to failǯ has evolved as a result of the global
inancial crisis. Terms such as Ǯbank resolutionǯ and Ǯbail-inǯ are
frequently used and it is assumed everyone understands them.
This article ȋextensively based on articles produced by the Bank
of EnglandȌ is intended to explain just what these terms mean.
During the global inancial crisis, banks faced signiicant losses that
reduced the value of their balance sheets to such an extent that they
lost access to liquidity. This so seriously constrained banksǯ activities
that the authorities were forced to intervene to stop banks from
collapsing and taking the real economy with them. This intervention
was provided in a number of ways:
– emergency funding to inancial markets
and individual inancial institutions to ensure that they could
continue to meet their obligations as they fell due.
– selected asset classes, such as corporate bonds,
were purchased from inancial institutions to improve the liquidity
of credit markets.
– public authorities guaranteed some
liabilities, such as deposits or new/existing debts, to shore up
conidence in the inancial system.
– or Ǯbailoutsǯ were provided in exchange for
full or partial ownership of individual irms. Thus depositors were
bailed out ȋsavedȌ contrasting with Ǯbail-inǯ where they take losses.
)n the US, 9͢͡ irms, including some non-inancial institutions,
beneited from some form of government assistance, amounting to
date to around $ͣ͢͝bn.
͝
)n the UK, the support was more sector-wide, with speciic support
for only four banks, amounting to £͝,͢͝͞bn at its peak.
͞
Although this stabilised the inancial system successfully, the cost
was borne by the public sector and shareholders rather than the
banksǯ depositors. Shareholders did lose because share prices fell
Business skills
Treasury essentials
The
bailout
lexicon
MANY FINANCIAL EVENTS AND ERAS ATTRACT THEIR OWN TERMINOLOGY AND JARGON – AND THE
AFTERMATH OF THE 2008 FINANCIAL CRISIS IS NO EXCEPTION. SARAH BOYCE AND WILL SPINNEY
PROVIDE A TRANSLATION AND LOOK AT THE IMPLICATIONS
Bail-in hierarchy
Below is the order in the UK in which capital is bailed in to resolve
a failed bank. Order of priority (from January 2015):
Fixed charge holders
(ie security in the form of: mortgage,
fixed charge, pledge, lien), including:
• Capital market transactions (for example, covered bonds)
• Trading book creditors (for example, collateralised positions)
Liquidators
(fees and expenses)
Preferential creditors (ordinary)
, including:
• Financial Services Compensation Scheme (FSCS),
taking the place of all protected depositors for amounts
up to £85,000
• Employees with labour-related claims
Preferential creditors (secondary)
:
• Depositors that are individuals and micro-, small- or
medium-sized businesses for amounts in excess of £85,000
Floating charge holders
Unsecured senior creditors
, including:
• Bondholders
• Trading book creditors (for example,
uncollateralised positions)
• Creditors with master netting agreements
(net position only)
• Commercial or trade creditors arising from the provision
of goods and services
• Depositors that are not individuals or micro-, small-
or medium-sized businesses for amounts in excess
of £85,000
• FSCS, taking the place of individuals with funds invested
with the insolvent firm (including protected amounts up
to £50,000)
Unsecured subordinated creditors
(for example,
subordinated bondholders)
Interest incurred post-insolvency
Shareholders (preference shares)
Shareholders (ordinary shares)
Proceeds flow down
Losses flow up
Source: www.bankofengland.co.uk/financialstability/Documents/resolution/apr231014.pdf
IAFEI Quarterly | Issue 31 | 66