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Bail-in to end the ʺToo big to failʺ dilemma

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Bail-in to end the ʺToo big to failʺ dilemma04



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Title Bail-in to end the ʺToo big to failʺ dilemma
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Material Type Videos
Author(English)

Korea Development Institute

Publisher

[Sejong] : Korea Development Institute

Date 2017-02
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Subject Economy < Financial Policy
Government and Law < Political Development
Holding Korea Development Institute
License

Abstract

As we saw with the recent banking crisis in Italy, the government tried to bail out, despite previously legislating the bail-in regime, due to the political pressure from creditors, who were mostly local residents. The majority of creditors in Korea also are the general public. As such, bail-ins may become obsolete if there are no additional institutional tools in place. This study first introduces the bail-in regime, and then, analyzes factors influencing the implementability of bail-ins, and finally, presents the institutional tools needed to enhance their efficiency. Depositors, general creditors and contingent convertible bond creditors are all subject to bail-ins. And while the government activates the bail-in for deposits and general bonds, that for CoCo bonds is automatically triggered by pre-established conditions. In Korea, bail-ins for CoCo bond creditors have been in operation since 2013 and that for depositors and general bond creditors will be legislated within the year. Of the bonds subject to bail-ins, only deposits exceeding the deposit protection limit of 50 million won are included. These deposits take up the largest share of the total financing of Korean banks at 27.5%. However, within this type of structure, much like in the case of Italy, the government will most likely choose a bail out, even if bail-ins are available, due to the heavy political burden posed by the vast number of individuals, small business operators and SMEs. So, what are the factors affecting the implementability of bail-ins? Theoretically, when the market anticipates a bailout, there is an increase in the number of investors.