BoE 'Bail Ins': Investors pay when firms fail.

tranquility1

Any thoughts on this? How might it affect your average investor of a passive tracker?

dunstonh

Nothing to do with regulated unit-linked funds unless they hold shares or bonds in the bank in question.

kuratowski

This is a result of the post 2008-09 regulatory reforms.  As dunstonh says, it's not "investors in general" it's the specific investors who hold capital instruments issued by the bank(s) who fail.
If you read too much on this topic, you'll probably die of boredom (says he, bitterly) but the wikipedia page is tolerably readable:
https://en.wikipedia.org/wiki/Bailout#Bailout_vs._bail-in

El_Torro

If I understand it correctly (I should probably read the link that kuratowski posted, I only skimmed it) then people who have shares in the failing bank could be negatively affected, in the form of worse returns.

Probably not a big deal for people who own tracker funds, or even managed funds which don't invest heavily in banks. If those particular shares perform badly as a result of a bail-in there are plenty of other shares in the fund that will drown out the noise.

Goes to show that it's not a good idea to pick one bank and invest all your money in shares of that bank. Anyway this is true regardless of whether or not bail-ins exist.

tranquility1

El_Torro said:

If I understand it correctly (I should probably read the link that kuratowski posted, I only skimmed it) then people who have shares in the failing bank could be negatively affected, in the form of worse returns.

Probably not a big deal for people who own tracker funds, or even managed funds which don't invest heavily in banks. If those particular shares perform badly as a result of a bail-in there are plenty of other shares in the fund that will drown out the noise.

Goes to show that it's not a good idea to pick one bank and invest all your money in shares of that bank. Anyway this is true regardless of whether or not bail-ins exist.

If a bank is having to be "bailed-in" by it's investors, I doubt your other shares would be "drowning out the noise".  They'd likely be in trouble too.

El_Torro

tranquility1 said:

If a bank is having to be "bailed-in" by it's investors, I doubt your other shares would be "drowning out the noise".  They'd likely be in trouble too.

Depends. If it's an issue with one bank then it may not have far reaching repercussions. If it's a result of a financial crash (like in 2007) then yes, it's likely that all shares will suffer. That's true regardless of whether there are bail outs or bail ins though.

My point was that if your portfolio is diversified enough then whether banks get bail outs or bail ins doesn't really matter to an investor.

I'm not sure what point you're making with this thread, but if it's that bail ins make investing more risky then this isn't really true, at least for a well diversified investor.

Thrugelmir

If you were a shareholder in the bank then like any company which becomes insolvent you would be wiped out. The bill enables the bank then to recapitalise by issuing shares to creditors with the debt they are owed wiped out.  Saves the government (taxpayer) the problem of injecting cash (in the form of new shares) to repay the creditors.  RBS being the example of a costly exercise for the taxpayer. Figures of £30 billion have been suggested. With the Government still holding a sizable share stake to offload. 

tranquility1

El_Torro said:

tranquility1 said:

If a bank is having to be "bailed-in" by it's investors, I doubt your other shares would be "drowning out the noise".  They'd likely be in trouble too.

Depends. If it's an issue with one bank then it may not have far reaching repercussions. If it's a result of a financial crash (like in 2007) then yes, it's likely that all shares will suffer. That's true regardless of whether there are bail outs or bail ins though.

My point was that if your portfolio is diversified enough then whether banks get bail outs or bail ins doesn't really matter to an investor.

I'm not sure what point you're making with this thread, but if it's that bail ins make investing more risky then this isn't really true, at least for a well diversified investor.

Is your "diversification" all in shares in companies?  Because if so, is it really "diversification"?