there is no doubt that it is a clever and subtle idea. But there is no account of what might happen after this recapitalisation (of the op-co) has been put in place. In a game with many rounds, such as chess, the expert players are those that are trained to think many steps ahead. Within the bail-in process, the (main) operating subsidiary (the op-co) is meant to continue, so this is supposed to be a multi-stage exercise. Yet nothing is said in this paper about subsequent stages, nor the problems that might arise therein. I raise some queries about what might happen after the initial resolution is triggered.
Read the whole thing for specifics. Pointer from Mark Thoma.
SPOE stands for Single Point of Entry, which I think relates to what Goodhart calls TLAC. My hypothesis is that the regulators will start to look one step ahead just when the first big bank failure occurs, and what they see will convince them to do a bailout instead.
“All regulation tends to be pro-cyclical.” Money.
I guess they know it. Why don’t they do something about it? On second thought, every time they do something it seems to be to make it moreso.
Why don’t we emphasize risk during the run up instead of at the precipice?
For example, shouldn’t every major policy meeting have a black hat who points out how the policy might be pro-cyclical?
Healthcare expenditures in the recession come to the front of mind…