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Bail-in to end the “too big to fail” dilemma

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Frame of Image igned to resolve failed banks via loss-sharing by shareholders and creditors, bail-ins were introduced to substitute bailouts, which are known to create moral hazards in banks and a crisis in national finance. However, in cases wherein the majority of creditors are the general public, governments are still more inclined to bail out, despite the bail-in instruments being available. To increase the effectiveness of bail-ins, supplementary methods, such as depositor preference and contingent convertible bonds (CoCo bonds) with rule-based triggers, are needed.”
. Ⅰ Introduction
Banking crises have a detrimental long-term impact on both the national income and fiscal condition. Accordingly, preventative measures are vital, especially with the recent rise in household debt and concerns over the deteriorating quality of corporate debt. However, this demands not only the government’s prudential regulation of banks but also
* Written based on Hwang, Sunjoo, “Bail-in, Implementability and Policy Implications,” Research Monograph 2016-03, Korea Development Institute, 2016 (in Korean) and Hwang, Sunjoo, “Does the CoCo Bond Effectively Work as a Bail-in Tool?” Working Paper, 2017.
Bailouts create moral hazards, and could lead to another banking crisis.
KDI FOCUS
2
the banks’ own efforts to minimize the underlying risks. Still, when there exists a belief in the market that there is a government safety net for large failed banks, financial institutions will be less inclined to manage their


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Title Bail-in to end the “too big to fail” dilemma
Similar Titles
Material Type Reports
Author(English)

Hwang, Sunjoo

Publisher

Sejong, South Korea:Korea Development Institute

Date 2017-02
Series Title; No KDI focus / no. 80
Pages 9
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Economy < Economic Administration
Holding Korea Development Institute
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