E Will The Banks Game FSB And Investors With Voodoo TLAC Assurances?

The Financial Stability Board (FSB), which once voided mark to market so that banks would not have to devalue frozen assets, is back with more voodoo.

FSB wants the biggest 30 banks in the world to increase assets available for a bail in to levels near 20 percent, which hopefully will relieve taxpayers from actually bailing out too big to fail banks, effectively ending the concept of too big to fail. 

FSB created massive moral hazard in allowing frozen assets to be frozen as to price. It made the banks feel invincible. Yes, banks not selling assets could ride them out without downgrading the value of those assets. But certainly, investors suffered in attempting to value the big banks.

Other Investors who invest in senior bank bonds were unscathed in the credit crisis of the last decade. They were simply not touched as the powers that be decided that taxpayers were somehow more worthy of bailing the banks out than the senior bond holders. 

But banks need a lot of assets made available for bailins. I guess the financial powers that be don’t want to destroy the governments that feed them. So, they are going for bailins next time. Most banks don’t even come close to satisfying the Total Loss-Absorbing Capacity or TLAC.

So banks are being permitted, in most nations, to use senior bonds as TLAC assets. This means that banks will have to raise a lot less money. This is the voodoo aspect to all this. 

Banks are trying to convince investors that interest on the senior bonds should not have to go up that much. Investors are likely to swallow this argument. You have to wonder why, since this is the front line now for bailins. FT says the plan won’t work if senior bonds are not included in the loss-absorbing assets. 

The FT article goes on to make a distinction between the senior bond plan calling it the German approach and distinguishing it from the Spanish plan, a method of creating tier 3 assets available for loss-absorption.