The Inquiry has asked for views in relation to the resolution powers available to APRA to deal with a distressed bank and in particular one that is considered “too big to fail”. The Interim Report contends that Australia’s resolution regime is broadly consistent with international best practice but that a comparison with the Financial Stability Board’s Key Attributes of Effective Resolution revealed “several gaps in resolution tools and powers”.
In our submission we argue that:
- it is not self-evident that the existence of a statutory bail-in power in and by itself will change the behaviour of market participants so as to reduce the moral hazard associated with an institution being “too big to fail”;
- any bail-in power needs to operate clearly and fairly. This may require a re-consideration of Australia’s existing preference for “protected accounts” and other changes to the Banking Act, which, as currently drafted, may distort the effect of the bail-in; and
- there are impediments to the operation of a bail-in power in certain circumstances, for instance bonds governed by a foreign law. The most secure way to circumvent this impediment is to supplement the power with a contractual agreement by bondholders to be bound by the exercise of a power under the statute. It may be preferable to formally recognise senior debt containing an agreement to be bailed-in as an additional category of obligation contributing to the capital structure of the bank.
Our submission delves into questions as to whether Australia should have a ‘bail-in’ power, how such a power would work in the Australian legal framework and what should trigger the operation of the power.
In our view:
- the introduction of a statutory bail-in regime is another example of an idea emanating from overseas regulation that needs careful consideration and refinement before it migrates to Australia;
- for it to operate here fairly we may need to re-examine features of our existing prudential regulation, in particular the unlimited preference to protected accounts in Australia; and
- in order to avoid limitations on the effectiveness of statutory bail-in, it may be preferable to promote the creation of a new class of instruments, under which senior creditors agree to be bailed-in, after the holders of regulatory capital instruments.