The restructuring plan means Co-op Bank should avoid being put into resolution by the Prudential Regulation Authority. That can only be a good thing, and it proves that banks can be pulled back from the brink if bondholders are willing to negotiate (which they should be, as the alternatives under resolution would generally entail lower recovery).
But the extent to which the deal flipped in favour of bondholders — after they banded together to challenge the initial terms of the deal, something Co-op clearly wasn’t expecting — proves just how difficult it is to take them on and come out on top. As the FSB adds the Industrial and Commercial Bank of China to its list of institutions that are too big to fail, the question arises again — what hope for big banks?
This is the crux of it. Bail-in type methods need to work at large global banks. The effects of Co-op Bank’s travails have not been felt much outside the UK. But imagine the shockwaves from trying to rescue a huge institution like, say, Deutsche Bank or UBS. They have thousands more bondholders, counterparties, and affected institutions and there will be far bigger shockwaves.
Co-op Bank gives us hope that timely rescues can be made. But would regulators like Bank of England governor, Mark Carney, who recently announced a raft of extra liquidity measures for the UK’s banks, really pull the bail-in trigger if a large bank were to fail, given that the knock-on effects could be so severe? They may have greater capabilities to do so than five years ago, but are they any more willing?
We know some banks will fail the upcoming stress tests being conducted by the European Central Bank and that those banks will need recapitalising.
The Bank Recovery and Resolution Directive — a scheme that will make investors more receptive to bondholder-driven capital increases, if they are necessary — won’t be implemented by then, even though the implementation date will be drawing closer.
But for now, we have no rcross-border regime in place for banks that fail and certainly nothing in that looks workable should a big bank hit the skids.
Taxpayer bailouts are not an option for the big boys and if Co-op Bank is anything to go by, the alternatives could be very messy.