Bank Resolution In The Wake Of Crisis Falls On Junior Debt Holders

Banks that have been financially “resolved” after facing failure nonetheless have high credit risk under certain methods of analysis. In the wake of the 2008 financial crisis, regulators have new tools to “wind up” a bank with a new plan for “burden-sharing.” But unlike the overtly polite language, such liability structures can feature shifting sands for investors depending on the debt layer, a Moody’s report on bank resolution observed. While the new tools are promising, under certain circumstances regulators are going to be constrained in undertaking a full bail-in if failure circumstances were to repeat.

Bank assistance after their failure in 2008 led to a political awakening on both sides of...