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typo: s/bankrupt/insolvent/ As you're probably aware, bankrupt is not a relevant concept for banks. Creditors- depositors- do not get a haircut, their deposit

typo: s/bankrupt/insolvent/ As you're probably aware, bankrupt is not a relevant concept for banks. Creditors- depositors- do not get a haircut, their deposits are insured.

cm2187 6y ago
No, banks can go bankrupt like any other company. I think you are refering to Chapter 11 (in the US), which is true, isn't practical for a bank, because the bank has no other business than being trustworthy to its creditors, so it couldn't really operate under Chapter 11. The deposit insurance only applies to deposits below a certain threshold and doesn't concern the bank, it just means the state will make the customer good for its loss in a bankruptcy. Now in practice central banks will do everything they can to avoid getting there, first by forcing banks to hold a lot of capital and liquidity. But it can still happen, and one of the tools available is bail-in, which effectively replicates the effect of a chapter 11 over a week end, outside of courts. I think in most jurisdictions, wholesale creditors are the most likely to get a haircut in a bail-in, and the insured part of the deposits is explicitely non-bailinable. But any deposit above the insured threshold can in theory be affected by a bail-in and have a haircut applied. But a lot of fail safe mechanisms will have failed before that happens.
- jonahbenton 6y ago
  Thanks, yup- to be more precise, a state of insolvency- liabilities > assets at close of business- may result in one or more outcomes, one of which is essentially bankruptcy + bail in, but another might be, eg being absorbed/acquired?
  - cm2187 6y ago
    Correct. Though just to be precise, a bailin would happen well ahead of a bankruptcy, the regulator wouldn’t wait for the situation to be that bad to call the bank non viable (except in a jump to default scenario). Absorbed/acquired: that’s a bailout. Always an option but I think everyone agrees no one wants to see that happen again unless it is a willing private buyer.

typo: s/bankrupt/insolvent/ As you're probably aware, bankrupt is not a relevant concept for banks. Creditors- depositors- do not get a haircut, their deposits are insured.

cm2187 6y ago

No, banks can go bankrupt like any other company. I think you are refering to Chapter 11 (in the US), which is true, isn't practical for a bank, because the bank has no other business than being trustworthy to its creditors, so it couldn't really operate under Chapter 11. The deposit insurance only applies to deposits below a certain threshold and doesn't concern the bank, it just means the state will make the customer good for its loss in a bankruptcy. Now in practice central banks will do everything they can to avoid getting there, first by forcing banks to hold a lot of capital and liquidity. But it can still happen, and one of the tools available is bail-in, which effectively replicates the effect of a chapter 11 over a week end, outside of courts. I think in most jurisdictions, wholesale creditors are the most likely to get a haircut in a bail-in, and the insured part of the deposits is explicitely non-bailinable. But any deposit above the insured threshold can in theory be affected by a bail-in and have a haircut applied. But a lot of fail safe mechanisms will have failed before that happens.

jonahbenton 6y ago
Thanks, yup- to be more precise, a state of insolvency- liabilities > assets at close of business- may result in one or more outcomes, one of which is essentially bankruptcy + bail in, but another might be, eg being absorbed/acquired?
- cm2187 6y ago
  Correct. Though just to be precise, a bailin would happen well ahead of a bankruptcy, the regulator wouldn’t wait for the situation to be that bad to call the bank non viable (except in a jump to default scenario). Absorbed/acquired: that’s a bailout. Always an option but I think everyone agrees no one wants to see that happen again unless it is a willing private buyer.