Cap Creditors' Bailouts?
By Arnold Kling
Russ Roberts tucks an interesting suggestion into his diatribe against the arrogance of financial regulators.
A ceiling of 50 cents on the dollar for creditors and lenders when the institutions they fund become insolvent is a natural place to start
Suppose that we could somehow decree that, apart from individual depositors, creditors and lenders could receive no more than 50 cents on the dollar in any resolution of a financial firm that requires taxpayer support. If that were an ironclad rule, then creditors would have an incentive to force insolvent financial firms into bankruptcy. That in turn might induce creditors to write bond covenants that require the sort of “living wills” that regulators are starting to consider. It might even induce creditors to stay away from large, complex, opaque financial institutions and put their money instead in smaller, more straightforward banks.